Defensive & Diversifying Strategies: What Has Worked in 2020?

Everyone’s true colors show eventually

June 2020. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Defensive smart beta strategies like Low Volatility did not offer much capital protection in 2020
  • Long-short multi-factor investing generated negative returns, but still offered diversification benefits
  • Managed futures finally found their redemption given positive & uncorrelated returns


“The best defense is a good offense” is frequently quoted in the military (George Washington), sports (Vince Lombardi), games (Risk, Settlers of Catan), as well as in business (ask any entrepreneur). Given the high valuations of stocks and low bonds yields in the US, which implies low expected returns for both asset classes, it might indeed be argued that “the best offense is a good defense” for the coming decade.

However, constructing a defensive portfolio is easier said than done. Let us start with the definition of defensive. A defensive long-only strategy is one that allows investors to achieve index-like returns with less volatility. Additionally, many defensive products highlight their ability to experience smaller drawdowns than their non-defensive counterparts.

Traditionally, bonds were the go-to defensive instrument, however, although they still constitute a large share of investors’ portfolios, they have lost much of their value in asset allocation due to lower or negative expected returns. Alternatives like private equity or real estate are far less alternative than commonly marketed as both require economic expansion to generate positive returns, similar to equities.

Many investors are currently considering low-risk and high-quality stocks within their equity allocation given the opaque and gloomy outlook of the global economy caused by COVID-19. Some venture further and seek uncorrelated strategies in the hedge fund universe.

Fortunately, stock market crashes are rare. Unfortunately, therefore there are few data points in history for studying how well certain investment strategies have protected capital. The stock market crash in March 2020 contributes some further evidence (read Black Swans, Major Events & Factor Returns).