A Barbell Approach to Investing

To bullet proof your portfolio and achieve positive returns in a crash, you need to hold almost zero equities, a lot of cash, gold / silver, hedge funds and private equity.

Just sharing my thoughts.

The traditional barbell approach is to hold 50% cash / AAA rated bonds, maybe silver and gold. Things that should make money when stock markets crash (defined as > 20% drop). The other 50% is equities. If stocks were to crash by 50%, at least the “safe” portfolio will rise by 5%. Cash will not give you anything. AAA bonds maybe 5%. Silver and gold maybe 10 – 20%. Mind you the portfolio will still fall by 22.5%. 50% correction of a 50% allocation = 25%. 50% of a 5% increase for the safe portion is only 2.5% increase.

The other option is to go for 30% cash, gold / silver, 50% hedge funds / PE, 20% equities. In a crash, 50% of 20% for equities = 10% drop. Gold and silver up 15%, cash flat. So 7.5% (half of 30% into gold and silver) of 30% = 2.25% up. The hedge fund / PE portion, find 6 to 7 that has a high chance to achieve over 10% return annually. Maybe H2O Multibonds around 20% return per year, Sandler Offshore around 8%, Feng He around 14%, Man GLG Event Driven 9%, Rennaisance RIDGE 8%, Oaktree around 12%, Blackstone Secured lending 11%. You will get an average return of 12% for the hedge fund portion. 12% of 50% is 6%.

The blended portfolio will probably give you:

1.       Cash 15% / gold and silver 15% = 2.25%.

2.       Equities 20% = -10%

3.       Hedge funds / Private Equity 50% = 6% return.

Total portfolio = -1.75%.

So you see, in a bear market, as long as you have equities, and it crashes like it did in 2000 – 03, 2007 to 2009, 1997 – 1998, you will still suffer drawdowns as a portfolio. The only other way is to reduce your equity exposure to below 10%, increase hedge funds / PE, increase more AAA bonds.

H2O Multibonds update

H2O Multibonds appear to have broken a new high after 4 months of consolidation. It seems to consolidate once a year for several months before moving to a high. That consolidation point is always a good level to enter. They appear to have shaken off the controversy. 95% of their positions are liquid and easily traced, valuations clear.

This year, it is already up 24.6%. over one year, up 43.6%. 3 years up 27.7% per year, 5 years 23.7%.

We can’t just rely on one fund to achieve all the returns and we will look out for more hedge funds that can achieve this without too much volatility. Your hedge fund / PE portion cannot be just one fund or one strategy. In a sideways markets, long-short may not do well, but global macro like H2O do better, and market neutral strategies. IN a trending market, long-short, event driven may perform well.

A recap on how each asset classes behave in a bear market

I’m writing this out of memory. But here goes:

1.       Cash – 1 to 2.5% return per year.

2.       AAA bonds 10 year tenor 5 – 7% return. 30 year tenor 6 – 10% return.

3.       Gold and silver…. Depends. It could be down 10% or up 50% depending on inflation and central bank actions. This is not a reliable diversifier.

4.       Shorting stock markets, buy puts. 20 – 30%

5.       Hedge funds’ returns vary from 8% to 40% depending on style.