Bonds are not always a safe asset.

The new paper "Are Government Bonds Safe in time of war and Pandemic?" examines the behavior of bonds during periods of war and other non-financialcrises. Not surprisingly, there is a difference. Wars are associated with sharp declines in real returns and with returns that lag growth. The reasons are clear. There is elevated surprise inflation during a war, and governments impose financial repression, which creates a wedge between real returns and grwoth/. The bondholders bear the cost of war, even relative to risky assets. That is not the case during a financial crisis or a pandemic. Pandemics are similar to war in that they entail labor supply constraints, trade restrictions, a surge in spending, and significant increases in central bank balance sheets. 

All risks are not equal. Bonds are not always safe. The assumption that government bodies are always safe will be costly. Now, the war scenario may be easy to adapt to, but the real question is whether there are other government or geopolitical-induced events that are adverse for bonds. That is the real current question. When is the environment not safe for bonds? 

China is run by engineers - the US by lawyers - a different perspective

 

Dan Wang, a China-based reporter for many years, writes an insightful book about his impressions of the Chinese economy and political system in Breakneck: China’s Quest to Engineer the Future. The premise is that China's economy and political system are run by engineers, who are the key filter for understanding their leaders’ actions and behavior in addressing problems. In contrast, the US is driven by lawyers who are not builders and doers but activists who want to stop and control the economy and politics through the legal and regulatory system. On the surface, this dichotomy seems simplistic, yet Wang makes a strong case that this is an effective characterization. He does spend most of his time using the engineering framework to explain China, the center of the book, and his contrast with the US is not as well developed, yet I found this may be a good way of thinking about actions within China.

This is a short, very personal book, so do not expect deep analysis. Yet the presentation is compelling, and for those who want another perspective on the Chinese economy, it is a good read.  

Hedge fund rotation in 2026

 

Every year, we see investors change their appetite across hedge fund strategies, and 2026 is no different. There generally is a momentum component to hedge fund allocations. Strategies with strong performance will see strong interest in the following year.

For 2026, we are seeing increased interest in European hedge funds and in multi-strategy and event-driven strategies. There is also increased demand for digital assets, but we believe the current sell-off has cooled interest in these strategies. Interest in multi-strategy strategies has been the strongest among hedge fund strategies over the last few years. The low volatility and strong Sharpe ratios have been the primary drivers, despite the strategy’s high fees.

The value from trend-following is in the quintiles

 

The Mann Group provides another simple chart that explains why investors want to hold trend-following managers. We have seen the quantile chart before, but the comparison with global bonds and multi-strat provides more insight. First, we have higher-yielding investors who think they can just hold bonds as a safe asset. Bonds will not help you at the downside extreme. The darling of hedge funds has been multi-strat firms. They will do well in most cases except for the lowest equity quantile. When you need protection wuou will not get it. 

Strategy blend is important. Take a combination of trend and multi-strat, and you will be well served across all states of the equity market.