Bonds versus CTAs for Diversification

Better to lend, or follow the trend?

June 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Although yields are higher, bonds have also become riskier
  • Bonds and CTAs have generated similar diversification benefits since 1999
  • Applying a trend following overlay for equities was accretive in Europe and Japan


In May 2021 we made the case that bonds have become less useful in asset allocation given low to negative expected returns based on low yields, and could be replaced with liquid alternatives like managed futures, market-neutral multi-factor products, or long volatility strategies. The article was well timed as bonds fell in value in 2022 when inflation forced central banks to increase interest rates (read 60/40 Portfolios Without Bonds).

The expected return for bonds has improved as bond yields have increased, but so has the issuer risk. Rising interest rates mean governments need to pay more interest when refinancing their debt, which typically leads to larger budget deficits that are financed with more debt. At some point, governments will need to restructure their debt as the number of bond buyers is steadily decreasing given declining populations, e.g. China is expected to lose 600 million citizens over the next 80 years (read Aging & Equities: Selling Stocks for the Long-Term).

Naturally, such a scenario might still be decades away, but it is interesting to contemplate replacing bonds with alternatives. In this research article, we will contrast bonds versus managed futures, which are also known as CTAs or trend following funds.


We will use the S&P 500, U.S. long-term government bonds, and the SG Trend Index as proxy for managed futures funds as core building blocks for portfolio construction in this analysis. Furthermore, we create a trend equities strategy that allocates 100% to the S&P 500 if the 12-month return is positive measured every month, otherwise 100% is allocated to short-term U.S. Treasury bills (read