Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

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alex123711
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Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by alex123711 »

Allocators can no longer depend on bonds to offset the equity risk in their portfolios, said the CIO to his team, stating the obvious. We can debate whether the Fed will normalize interest rates in the coming decade – and I sincerely doubt they can – but we know for sure that they will not be able to do that in coming few years without causing a simultaneous stock and bond market collapse. We should be confident that the Fed won’t do that. So we can lean on that assumption in our portfolio construction. But let’s think about where else this may lead us.

https://www.zerohedge.com/markets/hedge ... appens-now
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typical.investor
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by typical.investor »

alex123711 wrote: Sun Sep 19, 2021 10:00 pm Allocators can no longer depend on bonds to offset the equity risk in their portfolios, said the CIO ...

https://www.zerohedge.com/markets/hedge ... appens-now
zerohedge in the above linked article wrote: in a crisis, bonds no longer provide material positive convexity
However, despite the assertion made by that CIO, I understand that at low rates, the impact of convexity is stronger than ever. See "HIGH PROFITS AT LOW RATES: THE BENEFITS OF BOND CONVEXITY "https://portfoliocharts.com/2019/05/27/ ... convexity/

The Effect Of Convexity On Bond Returns

Image

In no way do I see the conclusion reached that we must adopt blockchain technology as necessary. Rather, I see low rates meaning that a 1% change (presumably a decrease in a crash) would mean your bonds appreciate a good deal and are useful for rebalancing.

What is true is the real losses on bonds are not pleasant. That in no way means that convexity won't work in your favor in a crash. I dismiss the article as FUD.
Last edited by typical.investor on Sun Sep 19, 2021 10:50 pm, edited 1 time in total.
clown
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by clown »

Given that the CIO is not named, and given that many (maybe most/all) hedge funds have performed poorly, this is just clickbait. No credibility with me.
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HomerJ
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by HomerJ »

Sounds like the CIO is a moron. Anyone who puts "forever" in an economic forecast should be ignored.

Oh, it's from zerohedge... yep definitely should be ignored. Financial porn is detrimental.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by gtrplayer »

alex123711 wrote: Sun Sep 19, 2021 10:00 pm Allocators can no longer depend on bonds to offset the equity risk in their portfolios, said the CIO to his team, stating the obvious. We can debate whether the Fed will normalize interest rates in the coming decade – and I sincerely doubt they can – but we know for sure that they will not be able to do that in coming few years without causing a simultaneous stock and bond market collapse. We should be confident that the Fed won’t do that. So we can lean on that assumption in our portfolio construction. But let’s think about where else this may lead us.

https://www.zerohedge.com/markets/hedge ... appens-now
I don’t understand why it would be impossible for the fed to raise rates at some point in the not-so-distant future. Prior to the pandemic, rates were slowly on the path to normalization. This turned out to be a good thing as it gave the fed the ability to lower rates when the pandemic hit. When things do eventually return to a pre-pandemic world, which I’m confident will happen (Spanish flu lasted three years and we’re not two years in and have huge medical advantages they didn’t have then), the fed will start to normalize rates again and I don’t see why it would have a different effect than it did pre-pandemic (stocks continued to do well)…

Also, the fed has no mandate to make the stock market do well. If inflation remains high for a while, they will have to raise rates to combat inflation, per their mandate.

Of course, this is all guessing at the future, which Bogle told us is a fool’s game. Bonds will likely do well in the future, and stocks will likely drop… or they’ll both go up or both fall. Or stocks will never stop going up and bonds will never do well. Who knows?
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by nedsaid »

The reports of the demise of the 60/40 portfolio have been greatly exaggerated.
A fool and his money are good for business.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by HomerJ »

gtrplayer wrote: Sun Sep 19, 2021 10:56 pm I don’t understand why it would be impossible for the fed to raise rates at some point in the not-so-distant future.
This.

Extremely silly position to take that interest rates can never go up again.

I mean so silly, it's such a red flag, that you know you can ignore everything else written by that person.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by 000 »

Yes, it is broken. 'High quality' bonds offer an expected real loss and potentially unlimited real downside. Stock and bond indices now seem essentially the same trade (rates, structural viability) just with differing levels of volatility. So much for portfolio insurance. I wonder how much of the current situation is due to the massive use of passive stock and bond indices without regard for valuations or.... really anything at all.

I've lately been wondering if long vol will start to become mainstream in addition to usual suspects such as commodities.

In the end it seems leaving public capital markets will likely be necessary for a good return.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by muffins14 »

Please do not waste your valuable time on this stupid clickbait
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9-5 Suited
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by 9-5 Suited »

“Broken” is not a valid property of an asset allocation. Even if expected or forecasted returns of an asset within the allocation are worse than historical norms, the allocation itself can’t be “broken”. It just may not be right for some investors it used to be right for, and newly right for others who previously would have chosen a different one.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by dziuniek »

Even if we accept that bonds will stink for quite a bit...

I still don't see better or easier alternatives for the 40% of that* portfolio than bonds.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by Nowizard »

The focus is confused in that there is a difference between bonds providing a predictable rate of return versus providing portfolio protection. It is frustrating they provide little or no income, but they do continue to provide portfolio protection. In a recession you sometimes gain the most by losing the least.

Tim
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by HomerJ »

000 wrote: Mon Sep 20, 2021 2:19 am Yes, it is broken. 'High quality' bonds offer an expected real loss and potentially unlimited real downside. Stock and bond indices now seem essentially the same trade (rates, structural viability) just with differing levels of volatility. So much for portfolio insurance. I wonder how much of the current situation is due to the massive use of passive stock and bond indices without regard for valuations or.... really anything at all.

I've lately been wondering if long vol will start to become mainstream in addition to usual suspects such as commodities.

In the end it seems leaving public capital markets will likely be necessary for a good return.
I have no idea what you are talking about. Bonds probably are not proving any good returns in the next few years, but they won't crash 50% like stocks could. Bonds/cash/CDs still offer downside protection during a recession or stock market crash.
Stock and bond indices now seem essentially the same trade
Where did you come up with this idea?
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by nisiprius »

This is noise, from a self-interested party, published on a political website, echoing a story that's been told continuously for two decades while a 60/40 portfolio was quietly quadrupling investors' money.

1) Why on earth would any hedge fund manager ever have a good thing to say about a 60/40 policy portfolio?

2) People have been saying "60/40 is dead" at least since 2003, and since 2003 the Vanguard Balanced Index Fund (60/40) has averaged 8.86%/year, and would have almost quintupled any money you invested back then.

Image

I don't even see any obvious signs of slowing down, and the last 10, 5, 3, and 1 year returns all look perfectly usable to me.

Image


3) Zero Hedge (or ZeroHedge)...
...is a far-right libertarian] financial blog... Zero Hedge, per its motto,[a] is bearish in its investment outlook and analysis, often deriving from its adherence to the Austrian School of economics and credit cycles. While often labeled as a financial permabear, Zero Hedge has also been described as a source of "cutting-edge news, rumors and gossip in the financial industry".
Over time, Zero Hedge expanded into non-financial analysis, including conspiracy theories and fringe rhetoricassociated with the US radical right, the alt-right, and a pro-Russian bias...
Last edited by nisiprius on Mon Sep 20, 2021 10:58 am, edited 1 time in total.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

Post by TN_Boy »

000 wrote: Mon Sep 20, 2021 2:19 am Yes, it is broken. 'High quality' bonds offer an expected real loss and potentially unlimited real downside. Stock and bond indices now seem essentially the same trade (rates, structural viability) just with differing levels of volatility. So much for portfolio insurance. I wonder how much of the current situation is due to the massive use of passive stock and bond indices without regard for valuations or.... really anything at all.

I've lately been wondering if long vol will start to become mainstream in addition to usual suspects such as commodities.

In the end it seems leaving public capital markets will likely be necessary for a good return.
Bonds have an "unlimited" real downside only if we have something like hyperinflation, or they all default.

They may indeed provide poor real returns for several years going forward.Years of poor bond returns have happened before. But that is not an unlimited downside.

I doubt indexing is the cause of .... much of anything. Well, okay indexing has provided higher investor returns due to lower costs and greater tax efficiency.
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Re: Hedge Fund CIO: The 60:40 Portfolio Is Forever Broken, What Happens Now

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