Financial Alchemy (Pseudoscience)!

The investment industry is filled with investment strategies. Here are just a few:

• Risk Parity 
All Weather Alternative Funds Factor Based Global Macro Market Neutral 
• Convertible Arbitrage CTA
 Pure Arbitrage Merger Arbitrage Event Driven Riskless Arbitrage 
• Bank Loans Junk Bonds Senior Loan CLO 
• Private Equity Direct Lending 
• Real Assets Natural Resources Venture Capital Premia
Dynamic Beta 
• Portable Alpha Smart Beta Absolute Return Opportunistic Long/Short Equity 

Additionally the investment realm is riddled with various types of Asset Allocation Theories: Modern Portfolio Theory, Efficient Frontiers, CAPM (Capital Asset Allocation Model) and Yale Endowment Model. Investment strategies frequently utilize a combination of the above theories while charging high fees with less than stellar returns. There is no guarantee that past performances could be replicated; however, most investors usually anchor their investment decisions based on any given asset class’ historical return. Pseudoscience is fitting as these strategies are backward looking with high dose of hope, scientific sounding jargons and clever sales tactics. 

Could any or most of the aforementioned complex strategies outperform a simpler strategy over a long term horizon? I would welcome seeing performance comparisons of the above strategies against that of the 60/40 allocation (60%: S&P 500 Index + 40%: 5 Year US Treasury), highlighted below. Furthermore, in a balanced portfolio with a combination of stocks and bonds, it is preferable to allocate to 5 Year US Treasury rather than to a widely utilized broader bond fund which tracks Bloomberg Barclays Aggregate Bond Index.

5 Year US Treasury provides the ultimate capital protection with no credit risk, lowers interest rate risks, improves portfolio liquidity, lowers transaction costs, lowers overall portfolio volatility and offers optionality (with positive convexity) during stock market meltdowns.

At the time of this writing (1/18/2019), 5 Year US Treasury is yielding 2.60%; and in 5 years time it will provide a return of 13.0% with redemption of the principal amount and interest payments guaranteed by the US Government - beautiful display of certainty with return of money and return on money. 

Protect your financial assets with US Treasury. No one has lost money by buying and holding till maturity of US Treasury. 

Manu Hoque is an Institutional and High Net Worth Portfolio Manager