Unconstrained Investing

DEFINITION of 'Unconstrained Investing'

An investment style that does not require a fund or portfolio manager to adhere to a specific benchmark. Unconstrained investing allows managers to pursue returns across many asset classes and sectors.

BREAKING DOWN 'Unconstrained Investing'

The unconstrained investing was borne of the mistrust created after the 2008 financial crisis. Investors were wary of the market as well as the benchmarks used to determine whether the performance of securities and portfolios were meeting expectations. Fund and portfolio managers were required to follow the specific investment type guidelines and measure performance against fixed benchmarks, and this inflexibility meant that managers were not able to take advantage of market changes in a timely manner.

Unconstrained investing is said to focus on performance over time, rather than on short-term gains. It also eschews constraints created by focusing on benchmark tracking. In the case of fixed income investing, managers are not required to adhere to specific bond ratings, currencies, or sectors, as these requirements may only apply to a portion of the portfolio. Bond portfolio managers are allowed to use derivatives to hedge against price and rate ranges, as well as bet against the market through put and call options.

Unconstrained investing does present risk, as the movement away from strict benchmarks can leave managers with a wide latitude in investment decisions. This leads to portfolios seeing an increase in investment manager risk, since inexperienced managers without guidelines may make poor investment decisions that affect the value of portfolio. Managers are entrusted with understanding not only the interplay between the different asset classes and sectors, but also how different geographies and governments impact performance.

This type of investment style is different from absolute return investing. Unconstrained investing refers to the ability of the portfolio manager to pursue and test different strategies and approaches to portfolio management, while absolute return may imply a lack of consideration in understanding the value of assets.