FROM RISK LEVERAGING TO RISK HEDGING

Smart investors have to become #savvy and #comfortably adapt to manage the asset allocation not just with government #bonds, but addressing the hedging issue with
alternative categories long/short including
#cash,
#gold,
#cryptocurrencies,
#volatility,
#putoption and
#algos based #software in different assets starting from #currency

“The #coupon on your bond holdings provided a material source of return, on top of the #protection you gained by diversifying your equity risk.

Now that double benefit has turned into double jeopardy. As main central banks have lowered interest rates towards zero over the past decade, the yield component of the return on a portfolio of government bonds has evaporated. That leaves capital appreciation as the sole source of future returns. But the room for prices to rise has arguably all but disappeared too.

asset allocators will have to think about alternatives to #bonds, including #cash, #gold, #cryptocurrencies, and explicit #volatility strategies — such as #putoption directly hedging equities — with which they may be less familiar. There are pros and cons to each selection, but the key point is that, with the diversifying power of bonds gone, there is no longer any natural choice.

That inevitably means we should expect lower returns in the future from balanced portfolios because #freeinsurance through the bond market is no longer available.” FT