THE 60/40 PORTFOLIO AND THE DIVERSIFICATION BENEFITS OF MANAGED FUTURES STRATEGIES
Jun 13, 2023
PGIM Wadhwani examines the diversification benefits of CTAs when the traditional 60% equity / 40% bond portfolio does poorly.
Managed futures, or Commodity Trading Advisor (CTA) strategies employ futures contracts and a variety of trading strategies such as trend following. CTA strategies tend to perform well when traditional 60/40 portfolios do especially poorly. As 60/40 portfolios tend to fare poorly during periods of unexpectedly high inflation, CTA strategies can be thought of as a possible inflation hedge.
Many investors allocate less to CTA strategies than might be recommended by conventional portfolio optimisation considerations. It’s important to note that the average expected return of CTA strategies during periods when a 60/40 portfolio is rising is positive. Therefore, CTAs are quite unlike conventional tail risk strategies that tend to lose money when equity markets go up.
The current macro-economic outlook suggests an elevated risk of a recession. CTA strategies usually significantly outperform a 60/40 portfolio during recessions. Like most strategies, it is important to be patient when holding CTAs, as the return pattern is akin to “two steps forward, one step back.”
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