Improving the Performance and Higher Order Return Properties of the Industry's Dominant Portfolios — With 2020 Update

Due to a decade of declining (and now near-0%) interest rates, bonds are not useful to manage volatility in risk assets.

Overlaying two strategies is more useful to enhance risk-adjusted returns and improve higher-order return properties:

• A dynamic convexity strategy that (1) responds rapidly to sharp equity market declines, (2) takes profits as markets stabilize, and (3) sizes down in low volatility environments
• A systematic trend strategy that profits from medium to longer-term trends during persistent bull and bear markets while producing greater crisis alpha than peers in rapid market reversals

Risk-adjusted returns to these strategies when used as overlays to dominant industry portfolios are superior to a similar role that has historically been played by bonds:

• Long-only equity
• Traditional 60-40
• Risk parity
• Diversified hedge fund
• Multi-factor risk premia