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Bonds versus CTAs for Diversification

Better to lend, or follow the trend?

Nicolas Rabener
10 min read
10 Jun 2024

SUMMARY

  • 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

INTRODUCTION

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).

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