Your Alternatives Need an Alternative

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Alternatives got correlated. Then bonds did too.The 60/40 portfolio had a remarkable run. For decades, government bonds did exactly what allocators needed them to do: rise when equities fell and cushion portfolio drawdowns. The negative correlation between stocks and bonds was so reliable it became the baseline assumption for almost every model portfolio in existence.

The 60/40 portfolio had a remarkable run. For decades, government bonds did exactly what allocators needed them to do: rise when equities fell and cushion portfolio drawdowns. The negative correlation between stocks and bonds was so reliable it became the baseline assumption for almost every model portfolio in existence.

Then 2022 happened. From January to October, global equities fell 17.1% and global bonds fell 11.0%, both at the same time, for the same reason: inflation and rising rates.1 The cushion became a second source of loss.

It was the worst joint performance of stocks and bonds in a generation, and it exposed something that had been building quietly for years: the conditions that made 60/40 work were never guaranteed to last.

The deeper problem is that many of the assets sold as the fix only solve part of it. Private equity carries meaningful embedded equity beta once reported valuations are adjusted for smoothing, and real estate remains just as exposed to interest rates. Most liquid alternative strategies fare no better, turning out to be more closely tied to the market they’re meant to diversify than their marketing suggests.

When a real stress event hits, correlations between supposedly uncorrelated assets tend to rise exactly when investors need them not to. Managed futures is one of a small number of exceptions.

Managed futures is a strategy that seeks to predict market trends, going long in rising markets and short in falling ones, across equities, rates, currencies, and commodities.

The hedge fund replication methodology of DBi is tracked on a live basis through the SG CTA Managed Futures Index (Bloomberg: SGMDDBMF). It is considered the most reliable available proxy for how this replication-based approach behaves over time, although its limitations should be stated plainly: it is an index rather than a fund, cannot be invested in directly, and no individual investor will have realized precisely its return.

Since 2002, the index has held up across the…

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