The S&P 500 has fallen 25% this year, with the three major US stock indexes heading for their worst annual performances since 2008. Bonds haven’t provided portfolios with ballast—the Bloomberg US Aggregate bond index is pacing by the worst year on. a record dating back to 1976, a 16% decrease.

“In 50 years we haven’t seen debt and equity markets fall so much together,” said Rick Rieder, chief global fixed income investment officer and head of the global allocation team at BlackRock Inc. “I never talked to clients. so much in my life – everyone wants to know when this is over.”

The 60/40 model—in which investors put 60% of their money in stocks and 40% in bonds—is hot because Treasury bonds have not risen as they classically do when stocks fall. Traditional hedges haven’t fared much better. Gold, historically seen as a safe haven against inflation, has fallen by 8.7% in 2022, following three consecutive months of outflows from precious metal funds. Some of these reductions are due to the rising dollar.

Monetary tightening by the Federal Reserve has pushed up yields, hurting prices and eliminating the perceived hedge that bonds offer against stocks. The central bank has also indicated that it will continue to raise rates until rampant inflation reaches historical norms.

Mr. Rieder said the Fed rate hikes provided an opportunity to rotate into higher-rated short-term bonds, which now offer more attractive yields and fall less in price when yields rise. He also noted that corporate balance sheets are in the best financial shape heading into an economic downturn he has seen in his 35-year career.

“We bought a huge amount of one-year Treasury bonds at 4%, you’re getting paid to hold cash,” Mr Rieder said. which mature in one to two years, offering yields between 5%-6%. Then there are high yield bonds offering 8%.”

“This is nirvana for a fixed income investor,” he said.

Investors have $13.5 billion parked in exchange-traded funds that hold Treasury bonds maturing in one to three years. The iShares 1-3 Year Treasury Bond ETF, the largest fund of its kind, shows an expected return of more than 3.7% for the next year based on a calculation of its past 30 days of returns, as of Friday.

It’s not just the flows at the short end: Investors across Treasury ETFs have bought $101 billion this year, nearly double the previous annual record, potentially betting on a bond reversal.

Those less willing to exit the stock market have poured billions into equity strategies that promise lower risk, by holding historically less volatile stocks, or those using defensive options. While most of these funds outperformed the broader market, they are still lower than the year. For that reason, some investors say that these strategies are lower risk than they act as a hedge against declines in the stock market.

To be sure, the outlook for both stocks and bonds looks better from here, according to Roger Aliaga-Diaz, global head of portfolio construction and chief economist for the Americas at Vanguard Investment Strategy Group.

“The 60/40 portfolio has gone through a very rough period through an unusual period,” he said.

Havens that have soared while stocks and bonds have fallen? Managed futures, which follow market trends and systematically bet on them. Such funds – dubbed “alpha crisis” for their ability to outperform during stock market selloffs – are up an average of more than 16% this year, on track for the best annual performance since 2014, according to Jon Caplis, chief executive of the Hedge Fund. research firm PivotalPath.

The AQR Managed Futures Strategy, one of the most prominent such funds, with nearly $1.7 billion in assets under management, has returned 41% and a higher-volatility version of the fund is up 62% since Friday. Collectively, investors contributed $251 million to the funds this year, according to AQR Capital Management.

The few exchange-traded funds that offer similar strategies have seen similar interest and outperformance this year. The Mount Lucas KFA Index Strategy ETF, which trades futures in markets other than equities, is up 45% and has seen inflows of $213 million this year. The iMGP Dbi Managed Futures Strategy ETF, which seeks to mirror the performance of hedge funds that use the strategy the most, gained 32% while taking in $790 million.

According to Yao Hua Ooi, principal and co-head of the macro strategies group at AQR Capital Management, managed futures benefited from several trends throughout the year, including a strong dollar, rising commodities, and falling global stock and bond prices. . However, performances can vary significantly depending on the manager – although a quarter of hedge funds that operate such strategies returned an average of 23% in August, the worst performers are not rose only 7.6%, said Mr. Caplis.

Universa Investments founder and Chief Investment Officer Mark Spitznagel – which uses options strategies to protect against statistically improbable crashes – said part of the problem with the lack of refuge in this year’s bear market is how the investment industry think about risk, and mitigate it, in the first place.

Mr Spitznagel argues that managed futures insurance against the stock market this year has not been enough to offset the premiums investors have paid over the past decade when stocks have risen.

“Across the board in terms of risk mitigation, the cure is worse than the disease,” Mr. Spitznagel said.

This story was published from a wire agency feed without text modifications.

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