The hedge fund manager recommended asset allocators to think about alternatives to government bonds, such as “cryptocurrencies.”
The statement took cues from the sovereign assets’ inability to insure 60/40 portfolios after the Federal Reserve slashed interest rates to near zero.
In his latest op-ed on Financial Times, Capstone Investment Advisors’ Founder and CEO, Paul Britton, ended up mentioning Bitcoin as an alternative to government bonds.
The hedge fund manager, who holds over $22.5 billion worth of assets under management, advised asset allocators to look into “cryptocurrencies” as bonds lose their diversifying power in a risk-balanced investment portfolio. He further recommended gold and cash as alternatives to bitcoin.
Investors typically balance their portfolio risks by allocating 60 percent of the assets to equities and the rest to the government bonds. Historically, stocks and bonds have moved inversely to each other. Therefore, sovereign notes offset losses in the stock market.
S&P 500 and US 10-Year Government Yield fell in sync in March 2020 | Source: TradingView.com
But the COVID-19 pandemic has changed the equation drastically. As the virus loomed all across the U.S., it forced the entire economy to go into a state of lockdown. It resulted in a global market rout, wherein every asset and index fell by record margins, including bitcoin.
Help came from the Federal Reserve. The U.S. central bank launched an open-ended bond-buying program. It also slashed the benchmark interest rates to near zero, sending stocks higher, but bond yields to laughably lower levels. All and all, the Fed’s strategy misbalanced the classic 60/40 risk-parity portfolio.
Why Bitcoin
Bitcoin was among the primary beneficiaries of the Fed’s quantitative easing program. The cryptocurrency fell by more than 60 percent during the March 2020 rout, but still managed to recoup all its losses before traditional markets. As of this Tuesday, it was trading 150 percent higher from its year-to-date lows.
BTCUSD has surpassed global market recovery after Fed’s money injection | Source: TradingView.com, Coinbase
Part of Bitcoin’s gains also came because of its deflationary narrative. On May 11, the cryptocurrency underwent its third halving, a pre-programmed event that reduces its supply by half. That worked as a contrast to Fed’s money printing policies, with many Wall Street investors recognizing Bitcoin as a haven against inflation.
Legendary investor Paul Tudor Jones was among the first ones to make the comparison. In his investment letter published in early May, Jones announced that he is purchasing 1-3 percent positions in the Bitcoin Futures market, adding that “the best profit-maximizing strategy is to own the fastest horse.”
And now, with Britton mentioning bitcoin as one of the alternatives to rebalance 60/40 portfolios, the 11-year old asset could attain a “macro” status heading further into 2020.