60/40 Portfolios Without Bonds

Time for Kingslaying.

May 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.

This research note was originally published by the CAIA Association’s AllAboutAlpha blog. Here is the link.


  • Bonds have become less useful in asset allocation given low to negative expected returns
  • Liquid alternative strategies can be used to replace bonds
  • From a historic perspective, long volatility strategies would have been especially attractive


John Maynard Keynes famously asked, “when the facts change, I change my mind – what do you do, sir?”. If this question was directed at global pension funds and their fixed income allocation, then the answer would have to be “not much”.

Their average allocation to bonds was approximately 30% in 2020, almost identical to 1999, according to a study by the Thinking Ahead Institute. Over that 20-year period, global bond yields decreased significantly. The U.S. 10-year government bond yield fell from 5% to a mere 1.5% currently.

Given that the expected return of a bond is highly related to its starting yield, this had made fixed income in the U.S. less attractive and unattractive in Europe and Japan where yields are negative. The facts have changed, so why have not allocations?

Furthermore, public and corporate leverage is at peak levels, which reduces long-term economic growth and ultimately the ability of borrowers to repay debt, making bonds riskier.

In this short research note, we will explore replacing the traditional 40% allocation to bonds with liquid alternatives from the perspective of creating an anti-fragile portfolio (read Creating Anti-Fragile Portfolios).


Upfront, it is unlikely that there is a great alternative for bonds, at least from a historic