Paper Explores How Liquid Alternatives Can More Effectively Diversify A Fixed Income Allocation

Paper Explores How Liquid Alternatives Can More Effectively Diversify A Fixed Income Allocation

A “Blue Paper” titled It’s all About your Core from Pioneer Investment’s Thomas Swaney discusses how traditional diversified fixed income strategies may offer investors lower benefits than they think and that there may potentially be “equity-like risk” in non-treasury fixed income asset classes.

Specifically, Swaney cites research showing that various asset classes within the fixed income space may have higher correlations to equity markets and investors must truly understand these risks within their portfolios.  In times of market stress, high quality, U.S. Treasury securities are the only asset class that offers diversification benefit to a portfolio. Also, because interest rates are so low, the traditional relationships between interest rates and equity values may disconnect and that we may actually see rising rates during future equity market corrections.

Sweeney advocates that there is a better way to build a core portfolio by diversifying a portion of your fixed income portfolio into truly non-correlated asset classes in the alternatives space, including long/short, global macro, market neutral, and other hedge strategies.

The paper is part 2 of a 2 part series. His first paper discussed how duration contributed to overall portfolio performance in fixed income returns in the past 30 year trend of declining interest rates.

A link to the paper can be found here.