Portfolio Diversification in the COVID-19 Era

Over my 30 plus years in the capital markets, it appears there is never a bad time to discuss diversification, however, the current market environment suggests a more inviting moment to discuss the topic as noted in Figure 1 of the frequency of Google “stock market” term global searches as equity markets declined. Several of my past articles discussed various concepts of diversification, the current market interest affords another opportunity to review this topic.

Figure 1

Source: trends.google.com “Numbers represent search interest relative to the highest point on the chart for the given region and time.”


Market corrections and/or economic contractions are often related to structural changes or changes in market confidence. However, in the first several months of 2020, many economies were government-mandated to shut down and practice social distancing to fight the COVID-19 breakout except for “essential businesses”. COVID-19, an exogenous shock to the world economic system; an event-driven global economic slowdown.

As COVID-19 spread across the globe in 2020, the capital markets repriced in Q1. During this global crisis equity markets, commodities and REITs declined as noted in Figure 2. The VIX spot and VSTOXX spot volatility indices rallied and met or exceeded their financial crisis highs as implied volatility priced into the 80s. In a normal market environment, VIX and VSTOXX volatility indices tend to be range-bound between low teens to low 30s. Implied volatility priced in the 80s usually indicates a nervous market, last seen in 2008/ 2009.

The “lower for longer” interest rate mantra continues. What is probably the first time in American history (or at least post-WWII) on March 9, 2020, the entire U.S. yield curve temporarily declined below 1%. Except for the 30-year bond, the yield curve has primarily remained below 1% for the last several weeks.[i] During the Great Depression of the 1930s, yields were higher, high-grade commercial paper yielded 0.75% until it moved higher in 1937[ii].

2020 Returns


Figure 2

Source: Bloomberg; Barclayhedge.com; Mark Shore, Coquest Institute

Fig. 2 shows the March 2020 returns for various asset indices. Except for managed futures, the indices declined. Fig. 3 notes the Q1 returns declined by double digits, except for managed futures experiencing positive returns.


Figure 3

Source: Bloomberg; Barclayhedge.com; Mark Shore, Coquest Institute


When examining any index, the result is an average of the index’s constituents. Meaning some constituents are underperforming and some are outperforming the index, but it offers an indication of behavior.

Why Managed Futures Experienced Positive Returns?

Managed futures, also known as Commodity Trading Advisors (CTAs), parsing their returns by sub-sectors, the Q1 returns ranged from an average of -0.18% for discretionary managers to an average of 6.95% for currency traders, demonstrating not all CTAs are the same.

You may be asking why did CTAs experience positive returns in Q1? The history of CTAs tends to offer similar results during negative equity quarters as suggested in “Downside Analysis of the S&P 500 Index”.

Between Jan 1980 and June 2019, SPX experienced 50 negative quarters with an average return of -6.3% and a maximum loss of -23.2%. During those same quarters, CTAs averaged 3.3% returns with a maximum gain of 36.9% and a max loss of -8.9%.

A quick summary of managed futures:

  1. CTAs may take long or short positions in multiple futures markets including, equity indices, fixed income, forex, metals, energy, grains, softs, volatility indices, and options on futures, allowing for various potential market opportunities.
  2. Their risk management may be more quantitative relative to say a mutual fund manager. Their risk management may offer positive skewness to a CTA’s return distribution. This could be a value-add to an investor’s portfolio as discussed in my 2019 article, “The Good and Bad of Volatility”.
  3. CTAs trade in the futures and forex markets versus hedge funds frequently trading in the equity and fixed income markets.
  4. Their duration of holding periods may range from intra-day to holding positions for several months.
  5. Their strategies may vary to include from trend-following to spread trading (aka relative value).
  6. Some CTAs trade one market or sector. Some may trade only commodity futures or only financial futures. Some may trade across a spectrum of financial and commodity futures.


This is a short-list of items[i], but it begins to explain why managed futures may offer non-correlation to equities and many other asset classes including several hedge fund strategies and why they may experience positive performance in stressful economic cycles.


At the 2019 Illinois Economics Association, I presented correlation risk research relative to various hedge fund strategies. Several strategies offer an extension of a portfolio’s equity exposure and others are more of a diversifier such as CTAs. A summary of the presentation is found here.


The correlation rankings in Fig. 4 suggest hedge fund strategies contain various correlations to equities. The allocation of a given strategy should depend on the investor’s goal.

Figure 4

Source: Bloomberg; Mark Shore, Coquest Institute


I once heard a pension fund CIO mention, to protect the portfolio, you can’t prepare for the last battle, you must prepare for the next battle.  The current market environment demonstrates this concept as a different catalyst that triggered this crisis is different from the Great Recession and most other economic contractions in at least modern times. Yet, the strategy behaviors are finding the similarity to past events.

As the catalyst is different from most market corrections, the market behavior offers similar results as suggested by historical data. Equities tend to be highly correlated in selling environments. Long-only commodity indices and REITs demonstrate their positive correlation to the economic cycle. We never know when the next downturn will occur, therefore examining the utility of non-correlated returns may assist to mitigate tail risk losses.

If you have questions or would like to receive more information on this topic, please feel free to contact the author at mshore@coquest.com

Data: MSCI World Index (Developed Countries Only), MSCI Emerging Markets Index, S&P GSCI commodity Index, FTSE NAREIT Index, BarclayHedge CTA Index, BarclayHedge Hedge Fund Indices



[1] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2020

[2] Bowsher, N. (1965). Interest Rates, 1914-1965. Retrieved: https://fraser.stlouisfed.org/files/docs/publications/frbslreview/pages/1965-1969/62472_1965-1969.pdf

[3] Shore, M. (2018). Managed Futures Lecture Notes. DePaul University, Chicago.


Past performance is not necessarily indicative of future results. There is risk of loss when investing in futures and options. Futures can be a volatile and risky investment; only use appropriate risk capital; this investment is not for everyone. The opinions expressed are solely those of the author and are only for educational purposes. Please talk to your financial advisor before making any investment decisions.


About the Author: 
Mark Shore is the director of Coquest Institute at Coquest Advisors. He is also an adjunct professor at DePaul University. He is a candidate to receive his doctorate in business administration in 2020. He has a master’s degree in finance, behavioral science, and econometrics from The University of Chicago Booth School of Business. He frequently speaks at investment conferences and lectures workshops on alternative investments. He is a contributing writer to several global organizations. mshore@coquest.com