Included in the key takeaways is that real yields are above 2% (are they really though?). They note that if stock/bond correlations improve....if they improve would be a guess. The paper then goes on to support the WisdomTree Core Efficient Core Fund (NTSX) which leverages up such that a 67% allocation to the fund equals a 100% weighting to plain vanilla 60/40 like you'd get from VBAIX. It's return stacking before ReturnStacked. Any time I have looked at NTSX it has been very true to what it targets.
Part of WisdomTree's argument is that now that there is some yield, four point whatever percent is yield, bonds can be a little more of a cushion, the 4.4% yield helps versus a yield of 1% +/- back in late 2021. That is accurate, the 4% yield (carry) helps the portfolio in a way that 1% yields don't.
But bond math is still bond math. And longer term duration can be quite volatile. If the ten yen year treasury goes from 4.4% to 6.4%, people owning the actual paper would be sitting on a large price decline getting a below market yield. Anyone owning ETFs like UTEN or IEF would be in a similar but slightly worse position, the price on ETFs might never come back. I doubt that anyone who bought IEF five years ago at $117 will ever get back to even on a price basis, the fund is at $94 now.
Read the article but that is not how I would think about whether to wade into bonds with duration, NTSX has AGG-like exposure so I have to believe they mean bonds with at least some duration. We've said this before, the question that I think should be asked is whether the yield provides adequate compensation for the volatility and the risk if rates go up more. The right level is up to the individual. Seven percent if it ever happens would do it for me for at least some exposure, maybe even 6% but not 5%. There are yields in the fours and fives right now with very little volatility and there are enough disparate strategies that idiosyncratic risks can be diversified away.
Pivot to a paper from TIFF Investment Management titled Why Now Is The Time to Invest In Hedge Funds. They say that hedge funds are an "indispensable tool for the modern allocator." TIFF positions hedge funds as a bond replacement noting better returns than bonds with a little less volatility.
From 2000 on, hedge funds weren't so hot, relatively, but then the 40 year bull market in bonds ended. There are countless hedge fund strategies so if we read TIFF's context correctly, they are looking for and talking about hedge fund strategies that differentiate from equities and help offset normal equity volatility as opposed to a shop that goes balls to wall equities like Renaissance Technologies.
TIFF is an institutional firm so they have access to hedge funds that you or I would not have access to. There are all sorts of mutual funds and ETFs that are somewhere in the hedge fund realm in terms of strategy and results. There are countless managed futures funds of course, plenty of macro this or macro that, arbitrage and so on that we look at all the time.
If the TIFF article, and others like it, are compelling to you, there are ways to capture the effect they are talking about.
The table (symbols intentionally omitted) lists the attributes of four different mutual funds. They seem pretty hedge fundish to me. The learning curve is steep though. Systematic macro is going to have more moving parts than some other strategies. And as we always say, it is important to diversify your diversifiers and I would not load up on multiple funds from the same provider, they might put very similar trades into many of their funds which has the opposite effect of diversifying your diversifiers.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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