Do retirees need global macro / managed futures?

There are some simple rule of thumb for asset allocation based on age. One well-known approach is to set equity allocation at 100 minus your age. If you are 60, your equity allocation should be 40%. If you are 30, the allocation should be 70%.  Without setting up any straw men, we will say that the rule for most advisors is that the older you get the more you should switch into fixed income. Most new robot allocators will likely follow some age adjustment algorithm. The target date fund business have all been addressing the aging  asset allocation process through creating set maturities. The pie chart above is a typical allocation scheme based on age.

Aged investors will hold more of the "low-risk" assets that are supposed to generate more cash flow. It has been a driver of billions in asset allocation flows, but it may have been driven by a financial world that no long exists. Allocations to cash have generated no money and with any inflation, the real return is negative. The Fed has wanted you to get a negative real return. In fact, they would like it to be more negative. Bonds, the safe asset, have limited yield and could face new risks if the Fed starts to raise interest rates. These arguments are not new, but are relevant in the current potentially changing environment.

The assumption for holding bonds is threefold, safety through a less volatile asset, interest income through coupons, and diversification through  low or negative correlation with equities. All three of these assumptions may prove to be wrong. Bond volatility has been increasing and their safety has been called into question if rates rise. The low rates for the last few years has limited the yield from fixed income, and more recently the correlation between stocks and bonds has increased.

Is there an alternative to bonds that could help preserve wealth for older investors? If the macro environment changes to a rising rate, reduced monetary liquidity market, there are advantages with global macro and managed futures. The advantage for investors is simple for these macro strategies. Further diversification beyond bonds and the ability to short fixed income in a rising rate environment will help provide portfolio protection. These strategies will provide lower correlation and a potential hedge for equity and bond allocations. This may seem counter-intuitive for some, but principal protection of  portfolio is all about diversification in a complex environment.