In promoting his latest podcast with Michael Batnick, Ben Carlson listed talking points including "diversification is working again." When I clicked through I didn't see where in the convo they got to this talking point and I wasn't able to listen to it. On the other side of the trade, Walter Bloomberg Tweeted out a quote from Blackrock that "bonds no longer offer reliable protection" for when stocks decline.
Both things are true. Actually, the implication that diversification wasn't working was never correct, it was more like the manner in which we diversify has changed because "'bonds no longer offer reliable protection' for when stocks decline."
The conclusion coming is not that I want to own duration here, I do not, full stop. But I had a thought. If there is some sort of biggish correction this year (or worse), there is nothing preventing duration from offering protection. It's not reliable is Blackrock's point. My point is that the compensation is inadequate for the risk taken and that it's not reliable.
In this way, duration might be like managed futures. Last April, managed generally provided no protection when stocks dropped. Managed futures absolutely has the tendency to go up during market declines but the weakness is when things turn very quickly. Even fast signals won't be quick enough to react to a very quick turn around.
I talk about small exposures to several different alts with different risk factors. Duration certainly could be thought of as having different risk factors from the other things we talk about like arbitrage, various versions long/short and so on. I don't think too many people think of duration as being an alt but for correct sizing in a portfolio, maybe it should be.
The way we apply alts in a traditional 60/40 construct where maybe there are 5% allocations to eight different diversifiers, why couldn't one of them be duration? Maybe it will work on the next serious decline? If not, it may not be different than any other alt not "working" on the next decline.
Last April BTAL worked, merger arbitrage worked, managed futures did not and neither did duration but next time maybe the opposite will be true, sort of repeated from above.
In this light, if you wouldn't put 40% into any of the alts we talk about (I wouldn't) then you wouldn't put 40% into duration. I wouldn't put 20% into any of the alts we talk about and certainly not duration. If we're talking about 5-6%, it's just another alt, the consequence for being wrong is pretty small.
If we pivot to TPA and allocating between growth and stability, I think the argument for duration being included as stability is pretty weak and I don't think it has anywhere near the opportunity for growth or asymmetry as anything you might think to put in that bucket so I don't know how it fits in to TPA but I will give it some thought.
But to be crystal clear, in terms of adding duration to the portfolio
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