In the past decade, traditional long-only portfolios — typically composed of equities and government bonds — have provided reliable diversification benefits due to the generally negative correlation between stocks and bonds. However, since 2022, this negative correlation has turned positive, challenging the long-standing assumption of bond-equity diversification.

This paradigm shift presents a compelling case for exploring liquid alternative investments, especially trend-following Commodity Trading Advisors (CTAs), as a means to restore and enhance portfolio diversification, reduce risk, and potentially improve risk-adjusted returns.

The Traditional 60/40 Portfolio: Solid, But Exposed

Let’s consider the performance of a classic 60/40 portfolio — 60% MSCI World (equities), 40% FTSE World Government Bond Index (bonds) — over the past 10 years, rebalanced monthly:

  • Annualized Return: 6.45%

  • Volatility: 9.4%

  • Maximum Drawdown: -21.3%

  • Sharpe Ratio: 0.50

  • Correlation to Equities: 0.96

  • Equity Beta: 0.67

While the absolute returns and Sharpe ratio are reasonable, the portfolio exhibits high correlation and beta to equities, implying significant vulnerability during equity market downturns—especially now, when bonds no longer act as a reliable hedge.

The Return Profile of CTAs

Now let’s look at trend-following CTAs, as proxied by the SG Trend Index:

  • Annualized Return: 4.55%

  • Volatility: 11.7%

  • Maximum Drawdown: -20.7%

  • Correlation to Equities: -0.10

  • Equity Beta: -0.09

At a glance, the raw return and volatility numbers may seem less attractive than those of the 60/40 portfolio. However, CTAs shine in their low correlation and equity beta reducing capabilities, making them powerful tools for true diversification.

Blending CTAs with 60/40: Risk Reduction Without Sacrificing Much Returns

Scenario 1: Adding 10% CTAs

Introducing a modest 10% allocation to CTAs, reducing the equity/bond mix proportionally (to 54% equities / 36% bonds), results in:

  • Annualized Return: 6.38% (just 0.07% lower)

  • Volatility: 8.3% (↓12%)

  • Max Drawdown: -16.6% (↓22%)

  • Equity Beta: 0.59

  • Sharpe Ratio: 0.54

Despite the slightly lower return, this portfolio sees significant risk improvements —lower volatility, smaller drawdowns, and reduced systematic equity exposure. The improved Sharpe ratio underscores better risk-adjusted performance.

Thanks to CTAs’ low correlation and beta reducing capabilities, the new allocation avoids compounding losses during equity downturns and accelerates recovery, making the impact far greater than simple arithmetic blending would suggest.

Scenario 2: Increasing CTA Allocation to 20%

Doubling the CTA weight to 20% leads to further benefits:

  • Annualized Return: 6.29% (↓0.16%)

  • Volatility: 7.5% (↓20%)

  • Max Drawdown: -11.8% (↓45%)

  • Equity Beta: 0.52

  • Sharpe Ratio: 0.58

Here, even with a slightly more noticeable return reduction, the risk metrics improve dramatically. The drawdown is nearly halved, while volatility is reduced by a fifth, offering a compelling proposition for more risk-conscious investors or those focused on capital preservation.

These outcomes suggest that the portfolio efficient frontier shifts positively with CTA inclusion — better risk-return combinations become accessible, especially for those sensitive to volatility and tail risk. Below is a performance chart of the three scenarios:

Cumulative Portfolio Return over 10 years

VAMI Chart-1

Source: Bloomberg, Resonanz Capital (Ensemble)

Beyond Numbers: The Strategic Case for Trend-Following

  • Crisis Alpha: CTAs often perform well during market stress periods due to their convex pay-off profile and ability to go long or short across global futures markets. Independent studies show that the majority of trend‑following’s lifetime return arrives during the ugliest equity quarters, while modern risk‑targeting techniques cut oversized positions before they implode.

  • Liquidity and Transparency: Unlike some illiquid alternatives, CTAs typically trade in highly liquid instruments and offer frequent reporting.

  • Structural Differentiation: Their methodology (e.g., momentum and trend strategies) is fundamentally different from buy-and-hold equity or bond exposures and its long-term correlation to 60/40 is zero or even negative.

  • Fees have collapsed: Index‑style or replication ETFs charge about 0.85 % a year—roughly one‑third of traditional hedge‑fund pricing — so the hurdle to add value after costs is much lower than it used to be.

  • Cash now pays: With risk‑free rates hovering near 4‑5 %, the idle collateral sitting behind a managed‑futures portfolio finally earns something, reducing the “cost” of diversification. 

  • Implementations as an institutional SMA / futures overlay allow for maintaining the classic 60/40 allocation, so there is no drag, convexity is added for free and the positive expected return comes on top. Meanwhile ETFs are also available offering this combination.

 

Conclusion: Do Trend-Followers still matter?

The breakdown of traditional equity-bond diversification and heightened geopolitical risks calls for a rethinking of portfolio construction. 

Systematic trend‑following (managed‑futures/CTA) programs are still one of the few liquid strategies that have (a) meaningfully low or even negative long‑run correlation to a 60/40 stock‑bond mix, (b) positive expected returns, and (c) a history of strong performance precisely when the classic 60/40 falters.

Whether you add 10%, 15% or 20%, the risk-adjusted performance enhancement is hard to ignore. In an era of higher inflation, rising rates, and uncertain equity returns, CTAs provide a potential vital complement to traditional portfolios.

The ability to access trend-following in a low-cost (e.g., ETFs) and effective way (e.g., overlay) means that a 60/40 portfolio without an exposure to trend-following is often leaving free convexity and thus improved absolute return (in some cases) or at least risk-adjusted performance on the table over the long term.

Reach out to explore how a customized liquid alternatives allocation could enhance your portfolio's resilience and long-term performance.

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