Filling the Gap: Enhancing Traditional Stock and Bond Portfolios with a Managed Futures Stack
Overview
Our latest paper explores how investors might enhance traditional stock and bond portfolios by overlaying managed futures—systematic trend-following strategies—on top of existing allocations. This “return stacking” approach seeks to preserve full exposure to core assets while introducing a historically uncorrelated return stream.
By maintaining familiar portfolio structures and avoiding the behavioral challenges of reallocating capital, this strategy offers a capital-efficient way to potentially improve risk-adjusted returns and reduce drawdowns. The paper provides historical analysis and practical implementation ideas for investors looking to modernize diversification without disruption.
Key Topics
Return Stacking, Portable Alpha, Managed Futures, CTA Trend
Introduction
Increasing volatility and correlations between stocks and bonds are reshaping today’s investment environment, leaving investors searching for new ways to restore diversification and resilience with few options on offer to fill the gap.
Managed futures – quantitative trend-following strategies run by Commodity Trading Advisors (CTAs) – have emerged as a compelling diversifier. These strategies have historically delivered low correlation to traditional assets and produced strong performance during prolonged equity and bond market drawdowns. And yet, despite these historical benefits, the behavioral drawbacks of making room in portfolios to hold something so different has precluded most investors and allocators from taking advantage of this unique alternative beta.
“In 2008, CTA strategies gained 20.9% while U.S. equities plummeted -37.0% and during the recent inflation-led bond bear market from August 04, 2020 to October 20th 2022, CTA strategies gained 56.1% as bonds suffered a -18.4% drawdown”
In this paper we explore how “stacking” managed futures on top of a core 60/40 equity/bond allocation may enhance investor outcomes without sacrificing any of their core stock or bond exposure. We will examine how a managed futures overlay may boost a traditional 60/40 portfolio’s return and Sharpe ratio, reduce drawdowns, and offer better improved behavioral durability – all through a more efficient use of capital.