For many years, most of our strategies used long term Treasuries (TLT, TMF) as a hedge against market corrections. These Treasuries have been a safe haven asset with negative correlation to the stock market and have been used successfully to reduce the risk/volatility of our strategies.
With rising rates and inflation, long term treasuries lose a part of their value as a safe haven asset. Their hedging value depends mainly on the speed interest rates go up. If rates go up slowly and inflation stays low, then ETFs like TLT will still be a good hedging choice. To be on the safe side we diversified our strategy hedge.
Universal Investment Strategy UIS
Our U.S. based Universal Investment Strategy UIS will have a hedge that can now choose between TLT and TIP. TIP is a very liquid inflation protected Treasury. TIP is less volatile than TLT and is a good alternative when TLT is heading lower.
Here is a 10 year comparison between TLT (lower red chart) and the hedging algorithm which switches between TLT and TIP (lower black chart).
In the year to date chart you can see how the allocation switches between TLT and TIP. Since October the hedging strategy is invested in TIP.
The new UIS strategy allocates between SPY and the TLT/TIP hedging strategy.
The annual return (CAGR) for the last 10 years has been 12.06% with a Sharpe ratio of 1.4. This compares with the performance of the original UIS strategy of CAGR 9.5% and Sharpe 1.1. So there is a clear improvement for the new strategy.
The Bond Rotation Strategy BRS
The Bond Rotation Strategy BRS will be improved by also adding TIP as a 5th ETF. BRS did very well this year with a year to date performance of 11.36% and this even without TIPs. Here TIP will not change much on the performance because even before, this strategy has been quite diversified. Now it invests in 5 Bond ETFs which are US Treasuries, US TIPs, Junk Bonds, Convertible bonds and Emerging Market Bonds.
Global Market Rotation Strategy GMRS
The GMRS has suffered this year from the sideways market and from the bad TLT Treasury performance. As GMRS is an international strategy we replaced TLT with a Top1 BRS strategy. This means that we are not limited to TLT, but always use the best of the BRS bond ETFs as a hedge. This combination makes the strategy very flexible, because on the equity side and on the bond side there is a good choice of ETFs. The risk adjusted return for the past is basically the same. Sharpe 1.47 for the new strategy and 1.46 for the old strategy. The real difference is only visible during the last 2 months where the new strategy using the BRS hedge managed a 7% out-performance from the original one. So, here we expect to see improvement in the coming months. Using BRS as a hedge is certainly a good strategy because BRS is a proven strategy which did very well these last years.
Global Sector Rotation Strategy GSRS
For the GSRS we also replace the TLT hedge with a BRS hedge. Here the new strategy shows a good improvement with an average annual performance going from 9.6% to 12.4% and a Sharpe going up from 1.1 to 1.5 for the last 10 years.
Here the improvement is bigger than for the GMRS because the Sector Rotation low-volatility algorithm favors larger allocations to the hedging component, TLT. This means that GSRS suffered more when TLT did not perform well. Now, going forward, the strategy should do better with the larger bond selection that the Bond Rotation Strategy provides.