The S&P 500 has fallen 25% this year, with all three major US stock indexes heading for their worst annual performance since 2008. Bonds haven’t provided a ballast to the portfolio—the Bloomberg US Aggregate Bond Index is on pace for its worst year ever. A record going back to 1976, down 16%.
Rick Ridder, chief investment officer of Global Fixed Income and head of the global allocation team at BlackRock Inc., said, “In 50 years we have not seen such a decline in the debt and equity markets.” There’s so much in my life – everybody wants to know when it’s going to end.”
The 60/40 model—in which investors put 60% of their money in stocks and 40% in bonds—has faltered because Treasury bonds haven’t risen the way they classically did when stocks fell. Traditional hedges haven’t fared much better. Gold, historically seen as a haven against inflation, is down 8.7% in 2022, leading to three consecutive months of outflows from precious metal funds. Part of those declines are due to the rising dollar.
Monetary tightening by the Federal Reserve has increased yields, hurting prices and eliminating the anticipated hedge offered by bonds against stocks. The central bank has also indicated that it will continue raising rates until large-scale inflation approaches historical norms.
Reader said the Fed rate hike presented an opportunity to turn to higher-rated short-term bonds, which now offer more attractive returns and fall less in price as yields rise. He also noted that corporate balance sheets are in the best financial condition going into the economic downturn they have seen in their 35-year career.
“We bought a tremendous amount of one-year Treasury bonds at 4%, you are being paid to keep the cash,” Mr. Ryder said. “We love triple-A-rated credit assets like mortgage-backed securities and collateralized debt obligations. Those that mature in one to two years are offering returns between 5%-6%. Then 8 There are high-yield bonds offering %.”
“It’s nirvana for a fixed-income investor,” he said.
Investors have invested $13.5 billion in exchange-traded funds holding Treasury bonds maturing in one to three years. The iShares 1-3 Year Treasury Bond ETF, the largest fund of its kind, shows an expected return of over 3.7% over the next year based on a calculation of its past 30 days’ returns as of Friday.
The flows aren’t just on the low end: Investors have bought $101 billion in Treasury ETFs this year, nearly double the previous annual record, potentially betting on a reversal for bonds.
Fewer people willing to exit the stock market have invested billions in equity strategies that promise less risk, either through holding stocks that are historically less volatile, or that use protective options. Huh. Although most of those funds have outperformed the broader market, they are still down over the year. For this reason, some investors say that these strategies reduce risk more than act as a hedge against stock market declines.
To be sure, the outlook for both stocks and bonds looks better from here on out, according to Roger Aliga-Diaz, global head of portfolio construction and chief economist for Americas at Vanguard Investment Strategy Group.
“The 60/40 portfolio has gone through an unusual period of very tough times. But looking ahead, valuations are much more realistic and the outlook for returns has improved,” he added.
A paradise that has risen while stocks and bonds have fallen? Managed futures, which follow market trends and bet on them systematically. According to hedge-fund chief executive John Capallis, such funds — “crisis alpha” for their ability to outperform during stock market selloffs — are up more than 16% on average this year, the best annual since 2014. On track to perform. Research firm PivotalPath.
The AQR Managed Futures Strategy, one of the most prominent funds of its kind, with nearly $1.7 billion in assets under management, has returned 41%, while a higher-volatility version of the fund is up 62% as of Friday. According to AQR Capital Management, investors have added $251 million to the fund this year.
Few exchange-traded funds offering similar strategies have seen similar interest and outperform this year. The KFA Mount Lucas Index Strategy ETF, which trades futures in markets other than equities, is up 45% and has seen $213 million in inflows this year. The IMGP DBI Managed Futures Strategy ETF, which seeks to reflect the performance of the largest hedge funds implementing the strategy, has gained 32%, taking in $790 million.
According to Yao Hua Oi, principal and co-head of Macro Strategy Group at AQR Capital Management, managed futures have benefited from a number of trends throughout the year, among them a stronger dollar, a rally in commodities and a decline in global stock and bond prices. However, performance can vary significantly depending on the manager — while the top one-quarter of hedge funds operating such strategies have delivered an average return of 23% through August, only the worst performers. An increase of 7.6%, Mr. Capallis said.
Mark Spitznagel, founder and chief investment officer at Universe Investments—which uses options strategies to protect against statistically impossible crashes—said that part of the problem with the lack of shelters in this year’s bear market is that investing How the industry thinks about risk, and mitigates it, in the first place.
Mr. Spitznagel argues that managed futures insurance against the stock market this year is not enough to offset the premiums paid by investors over the past decade when the stock soared.
“Across the board in risk mitigation, the disease has been treated worse,” Mr Spitznagel said.
This story has been published without modification in text from a wire agency feed.