Complementing An Efficient Core Strategy With Managed Futures

A traditional 60/40 portfolio aims to provide investors with exposure to equities with downside mitigation through an allocation to Treasuries. 

Historically, the practice of incorporating additional Treasury exposure to help hedge an equity portfolio has worked well, due to correlations between Treasuries and the S&P 500 Index being low or negative most of the time. This is a critical factor in the performance of a traditional 60/40 portfolio. 

More recently, with fears of inflation looming, Treasury yields near all-time lows and equity valuations stretched, fleeting moments of equity downturns coupled with rising rates give cause for a valid concern: What is the best way to hedge a portfolio?

We’ve made the case for the efficient use of capital through a leveraged 60/40 portfolio, building on the seminal research of Cliff Asness

A leveraged 60/40 portfolio, combined with an alternative asset class such as managed futures, can allow investors to deploy their capital more efficiently than with traditional asset allocation.

The Challenges of Adding Alternatives to a Traditional 60/40 Portfolio

Historically, incorporating alternative strategies such as a managed futures fund into a traditional 60/40 portfolio has come at the cost of lowered absolute performance. While adding an uncorrelated asset class can reduce volatility and drawdowns, absolute returns tend to be negatively impacted. With rates near all-time lows, adding an alternative asset class has become attractive for both diversification and return potential.

Of particular interest is the correlation between a traditional 60/40 portfolio and the BarclayHedge U.S. Managed Futures Industry BTOP50 Index (Managed Futures Index), which seeks to replicate the managed futures asset class focusing on trading style and overall market exposure. A managed futures strategy will invest in a variety of asset classes like commodities, currencies, treasuries and equities using futures contracts and, in some cases, will employ long/short strategies. 

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Disclosure: While the Funds are actively managed, their investment processes are expected to be heavily dependent on quantitative models and the models may not perform as intended. Equity ...

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