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Managed Futures vs. Bonds: Which Diversifier Does Better?

Writer: John Macy
John Macy
4 days ago
11 min read

Updated: 3 days ago

Written by John Macy, Financial Coach, MBA, Retirement Income Certified Professional® (RICP)



Can I just use bonds instead of managed futures?

In previous articles in this series we have presented evidence that managed futures provide very helpful diversification to a retirement portfolio, reducing volatility and 'worst loss' for a reasonable cost in reduced return. A thoughtful investor might ask: "Can I get the same protection by simply holding more bonds?" This article addresses that question directly.


To find out, we started from the same 75/25 three-fund portfolio used in the other articles and moved stocks into bonds in 5% steps, all the way to 100% bonds, keeping the same 70/30 U.S./international stock split and the same monthly data. (The 40%-bond point on this path is the conventional 60/40 portfolio.)


TL;DR: The short version

  • Bonds cut volatility further than managed futures did, but not the 'worst loss'. Starting from a 75/25 portfolio and swapping stocks for bonds, volatility fell from 11.83% to about 4.2% in the all-bond portfolio, well below the 7.4% floor managed futures reached. But the 'worst loss' stopped improving at about −16.7% (at 90% bonds), whereas 50% managed futures was able to reduce 'worst loss' all the way down to −10.0%.

  • 2022 had a big effect. When stocks and bonds fell together, bonds offered no diversification protection. Even an all-bond portfolio lost -17.5% peak to trough in 2020–2026, versus -3.9% in 2000–2009.

  • At the same 'worst loss', managed futures earned more. To hold the 'worst loss' near −22%, the bond path needed about 61% bonds and earned about 5.63% a year, versus a return of 6.64% for a portfolio with 30% managed futures. Across various 'worst loss' levels that both paths could reach, the managed futures advantage ranged from about 0.4 to 1.1 percentage points a year in increased return. In dollars, $100,000 grew to about $431,000 with 60% bonds versus about $552,000 with 30% managed futures.

  • The era mattered. Managed futures were the better diversifier in 2000–2009 and 2020–2026, but bonds were the better diversifier in 2010–2019. Neither tool won in every era.

  • Don't pick by Sharpe ratio alone. The 90% bond portfolio scored a Sharpe Ratio (risk adjusted return) of 1.00, higher than any managed futures mix, but it earned only 4.28% a year. Retirees need both risk control and return, not just a high Sharpe Ratio.


These are historical tests, not forecasts. We used the Vanguard Total Bond Market Index Fund (an intermediate-term fund), and the results included one major bond bear market. This article is a companion to Part 5: How Much Managed Futures Does a Retirement Portfolio Need?, which explains the data and method.



Finding 1: Bonds can lower volatility further than managed futures

The plain 75/25 3-fund portfolio earned 6.98% a year with volatility of 11.83%. We swapped stocks for bonds in 5% steps, keeping a 70/30 U.S./international split within stocks. Volatility fell steadily, bottoming at 4.17% with 95% bonds, well below the 7.42% floor managed futures reached (at 45% managed futures).


For small swaps, the two diversification tools reduced volatility about equally. Through roughly 25 percentage points swapped out of stocks, the results were nearly identical. Beyond that, bonds pulled ahead in terms of volatility improvement:

Stocks swapped out

Into managed futures: Annual Return

Into managed futures: Volatility

Into bonds: Annual Return

Into bonds:

Volatility

10 points

6.92%

10.26%

6.63%

10.40%

20 points

6.80%

8.92%

6.26%

9.01%

30 points

6.64%

7.94%

5.86%

7.68%

40 points

6.43%

7.45%

5.44%

6.44%

50 points

6.17%

7.55%

4.99%

5.36%

Table 1: Starting point: 75/25 portfolio, 6.98% annual return, 11.83% volatility. Full period, February 2000–August 2026.


Figure 1 illustrates visually how the two options compare in terms of annual return and volatility using the full period (2000-2026) results. (Note that the orange bond dot labels show the total bond allocation including the initial 25% bond allocation for the baseline portfolio plus any incremental addition of bonds in 5% steps. Thus, 30% bonds (25% baseline bonds + 5% additional bonds shifted from stocks) is equivalent to the blue 5% MF dot, 35% bonds is equivalent to the 10% MF blue dot, etc.)


Figure 1: Risk and return as stocks are replaced by managed futures (blue) or bonds (orange), starting from the 75/25 portfolio. Up and to the left is better. Managed futures earned more at every volatility level up to their 45% MF low point. Beyond that (open circles), volatility rises again and the path falls below the bond path.


From this graph it is easy to see that adding more bonds (above 55% bonds) can reduce volatility deeper than adding more managed futures, but at a significant cost in return. At the same level of volatility (from 7.5% to 12% volatility), the managed futures portfolios earned more than a comparable bond portfolio. For example, a mix with about 57% bonds (volatility about 7.4%, similar to managed futures' 45% low point) earned roughly 5.8% a year, versus 6.31% for 45% managed futures.



Finding 2: But bonds ran out of room on 'worst loss'

For the first part of the bond path, a bigger bond allocation shrank the 'worst loss' as you'd expect: from −42.01% to −22.56% at 60% bonds and −19.37% at 65%. Then it stalled. Incremental additions of bonds to the portfolio were not able to improve 'worst loss' much further. The best 'worst loss' any bond mix achieved was −16.74% (at 90% bonds), and the all-bond portfolio did worse (−17.52%). By contrast, 40% managed futures achieved a 'worst loss' of −15.95%, and the best managed futures mix reached a 'worst loss' of −9.97%. See Figure 2 below.



Finding 3: Reaching the same 'worst loss' cost far more return with bonds than with managed futures

Figure 2 illustrates visually how the two diversification options compare in terms of annual return and 'worst loss' using the full period (2000-2026) results. (Note that the orange bond dot labels show the total bond allocation including the initial 25% bond allocation for the baseline portfolio plus any incremental addition of bonds in 5% steps. Thus, 30% bonds (25% baseline bonds + 5% additional bonds shifted from stocks) is equivalent to the blue 5% MF dot, 35% bonds is equivalent to the 10% MF blue dot, etc.)



Figure 2: Annual return versus 'worst loss' as stocks are replaced by managed futures (blue) or bonds (orange). At the same 'worst loss', managed futures earned more, and bonds could not reduce the 'worst loss' below about −16.7%, while managed futures reached −9.97%. Open circles show managed futures allocations above 50%, where the 'worst loss' rises again.


This graph illustrates how managed futures can reduce 'worst loss' more than bonds, and at a much reduced cost in terms of return. At the same 'worst loss', bonds gave up roughly 3.6 to 7 times as much annual return as managed futures. In dollars, $100,000 grew to about $601,000 with no change. With 30% managed futures it was about $552,000, with a 'worst loss' of −22.19%. With 60% bonds it was about $431,000, with a 'worst loss' of −22.56%. That's a difference of about $120,000 over 26 years for about the same 'worst loss'.



Finding 4: The era matters, and bonds won in one of the three

The full-period result blends three very different decades.


All-bond portfolio (VBMFX)

Annual return

Volatility

'Worst loss'

2000–2009

6.17%

3.86%

−3.91%

2010–2019

3.57%

2.98%

−3.77%

2020–2026

0.63%

5.78%

−17.52%

Table 2: Same Total Bond Market fund, three eras.


For two decades, bond fund maximum drawdowns ('worst loss') never exceeded 4%. Then one episode (rapidly rising rates in 2022) produced a loss of 17.5%, and the annual return across 2020–2026 was well under 1% with a large 'worst loss'. For retirees who treat bonds as the safe part of the portfolio, that's an important lesson: bonds protect well against some risks and poorly against others.


Here is a comparison of a portfolio using bonds versus a portfolio with 30% managed futures (at the same level of volatility) across the three eras:

Era

30% managed futures: Return

30% managed futures:

Volatility

30% managed futures:

'Worst loss'

Bonds at same volatility

Bond portfolio:

Return

Bond portfolio:

'Worst loss'

2000–2009

5.17%

8.35%

−22.2%

about 52%

about 4.12%

about −27.3%

2010–2019

6.55%

7.25%

−9.8%

about 43%

about 7.89%

about −9.7%

2020–2026

9.01%

8.34%

−9.1%

about 67%

about 4.97%

about −18.3%

Table 3: Comparison of 'worst loss' across the 3 eras for bonds vs. managed futures


2000–2009: both worked, managed futures worked better. Adding bonds lifted the portfolio's return (2.66% to 5.19% at 75% bonds) because bonds did well while stocks lost ground. Managed futures did even better and cut the 'worst loss' more.


2010–2019: bonds were the better diversifier. In a long bull market with falling or stable rates, bonds delivered about 7.9% a year at the same volatility, versus 6.55% for managed futures, with a similar 'worst loss'. Bond-heavy portfolios posted very high Sharpe ratios in this decade (up to 1.62 at 85% bonds), while managed futures' benefit faded.


2020–2026: managed futures were far better. The same volatility cost much more return with bonds (about 4.97% versus 9.01%), and the bond mix suffered an 18% 'worst loss', twice that of managed futures. An all-bond portfolio earned 0.63% a year, with a Sharpe ratio of 0.14.


What this means. Neither tool won every era. Bonds helped when stocks fell and rates were stable or falling. Managed futures helped across both kinds of stress, including when stocks and bonds fell together. That is why the full-period results favor managed futures but shouldn't be read as a prediction for the next decade.



The bottom line

Bonds and managed futures are both legitimate diversifiers, but they protect a portfolio against different types of economic environments. For investors deciding between them, or how to divide the diversifying part of a portfolio between them, this data supports five conclusions.


First, bonds were the stronger tool for lowering volatility, but not for limiting deep losses. Volatility fell as low as 4.17% with bonds, far below the 7.42% floor managed futures reached. But no bond mix limited the 'worst loss' to better than −16.74%, while managed futures reached a 'worst loss' of −9.97%.


Second, bonds protect well against some risks and poorly against others. For two decades, a bond fund's 'worst loss' never exceeded 4%. Then the 2022 rate shock produced a -17.5% decline, and the all-bond portfolio averaged less than 1% return per year from 2020–2026. Bonds that help when stocks fall and rates are steady can fail when both fall together.


Third, reaching the same 'worst loss' cost far more return with bonds than with managed futures. Over the 'worst loss' range both could reach, bonds gave up roughly 3.6 to 7 times as much annual return as managed futures. In dollars, that was about $431,000 with 60% bonds versus about $552,000 with 30% managed futures, for about the same 'worst loss'.


Fourth, neither tool won every era. Managed futures were better in 2000–2009 and 2020–2026, and bonds were better in 2010–2019. A decade like the last one can make either choice look wrong, and the next decade may not resemble any of these three.


Fifth, don't choose by a single number. A 90% bond portfolio posted the highest Sharpe ratio in our tests (1.00), but it earned only 4.28% a year. The right question isn't which diversification tool scores the highest Sharpe Raio, but which risk you can least afford: a long stretch of low returns, a deep drop, or a period in which both stocks and bonds decline.


These aren't mutually exclusive. Many investors will hold both, and the better question is how much of each to hold. Part 5 of this series, How Much Managed Futures Does a Retirement Portfolio Need?, covers the allocation question.


What to keep in mind. These results come from a historical backtest using an intermediate-term bond fund, which went through one major bond bear market in our sample. Managed futures results shown in this article are based on an index that isn't directly investable (although in Part 5 we did analyze results using a real-world managed futures mutual fund). Real funds have fees and can differ from the index, and the tests ignore taxes. Backtests describe the past, not the future.


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Author:  John Macy, MBA, RICP®

John Macy is a professional financial coach and the founder of FlourishingPath Financial Coaching. With over six years of experience as a financial coach, John helps pre-retirees and retirees design resilient portfolios and income streams for their next act. Read his full story here.


This article is for educational purposes only and is not investment advice. Past performance, including hypothetical backtests, does not guarantee future results. Bonds and managed futures both involve risks and are not suitable for every investor. Consider consulting a qualified financial professional.


Sources and notes



Appendix

Tables Showing Summary Data for Managed Futures Allocations

Table 4: 75/25 starting portfolio, full period (Feb 2000–Aug 2026)

Managed futures

Stocks left

Annual return (CAGR)

Volatility

'Worst loss'

Sharpe

0%

75%

6.98%

11.83%

−42.01%

0.63

5%

70%

6.95%

11.02%

−39.02%

0.67

10%

65%

6.92%

10.26%

−35.90%

0.70

15%

60%

6.87%

9.55%

−32.66%

0.74

20%

55%

6.80%

8.92%

−29.28%

0.78

25%

50%

6.73%

8.38%

−25.77%

0.82

30%

45%

6.64%

7.94%

−22.19%

0.85

35%

40%

6.54%

7.62%

−19.12%

0.87

40%

35%

6.43%

7.45%

−15.95%

0.88

45%

30%

6.31%

7.42%

−12.70%

0.86

50%

25%

6.17%

7.55%

−9.97%

0.83

55%

20%

6.03%

7.82%

−10.67%

0.79

60%

15%

5.87%

8.22%

−11.36%

0.74

65%

10%

5.70%

8.73%

−12.05%

0.68

70%

5%

5.52%

9.34%

−12.74%

0.62

75%

0%

5.32%

10.02%

−14.52%

0.57


Table 5: 60/40 starting portfolio, full period

Managed futures

Stocks left

Annual return (CAGR)

Volatility

'Worst loss'

Sharpe

0%

60%

6.45%

9.70%

−34.26%

0.69

5%

55%

6.40%

8.91%

−30.94%

0.74

10%

50%

6.34%

8.18%

−27.48%

0.80

15%

45%

6.27%

7.53%

−23.88%

0.85

20%

40%

6.19%

6.98%

−20.18%

0.90

25%

35%

6.10%

6.56%

−17.03%

0.94

30%

30%

5.99%

6.29%

−13.79%

0.96

35%

25%

5.87%

6.20%

−10.45%

0.95

40%

20%

5.74%

6.29%

−8.19%

0.92

45%

15%

5.60%

6.55%

−8.90%

0.87

50%

10%

5.44%

6.96%

−9.61%

0.80

55%

5%

5.28%

7.51%

−10.31%

0.72

60%

0%

5.10%

8.16%

−11.01%

0.65


Table 6: 75/25 starting portfolio by era

Era

Managed futures

Annual return (CAGR)

Volatility

'Worst loss'

Sharpe

2000–2009

0%

2.66%

12.71%

−42.01%

0.27

10%

3.56%

10.86%

−35.90%

0.38

20%

4.40%

9.34%

−29.28%

0.51

30%

5.17%

8.35%

−22.19%

0.65

40%

5.88%

8.07%

−15.95%

0.75

50%

6.52%

8.58%

−9.97%

0.78

2010–2019

0%

9.17%

9.62%

−14.01%

0.96

10%

8.31%

8.61%

−12.61%

0.97

20%

7.44%

7.80%

−11.20%

0.96

30%

6.55%

7.25%

−9.78%

0.91

40%

5.64%

7.02%

−9.46%

0.82

50%

4.71%

7.14%

−9.54%

0.68

2020–2026

0%

10.35%

13.40%

−22.77%

0.81

10%

9.95%

11.56%

−17.70%

0.88

20%

9.50%

9.85%

−12.47%

0.97

30%

9.01%

8.34%

−9.08%

1.08

40%

8.46%

7.16%

−6.80%

1.17

50%

7.88%

6.48%

−5.88%

1.21


Table 7: 60/40 starting portfolio by era

Era

Managed futures

Annual return (CAGR)

Volatility

'Worst loss'

Sharpe

2000–2009

0%

3.49%

10.27%

−34.26%

0.39

10%

4.34%

8.50%

−27.48%

0.54

20%

5.13%

7.21%

−20.18%

0.73

30%

5.85%

6.70%

−13.79%

0.89

40%

6.51%

7.12%

−8.19%

0.92

50%

7.11%

8.34%

−9.61%

0.87

2010–2019

0%

8.12%

7.65%

−10.44%

1.06

10%

7.25%

6.72%

−9.00%

1.08

20%

6.36%

6.06%

−7.55%

1.05

30%

5.45%

5.78%

−7.41%

0.95

40%

4.52%

5.92%

−7.49%

0.78

50%

3.57%

6.46%

−7.95%

0.58

2020–2026

0%

8.44%

11.48%

−21.15%

0.77

10%

8.01%

9.63%

−16.02%

0.85

20%

7.53%

7.92%

−10.92%

0.96

30%

7.01%

6.48%

−5.89%

1.08

40%

6.44%

5.50%

−3.97%

1.17

50%

5.83%

5.26%

−6.95%

1.10


Tables Showing Summary Results for Bond Allocations

Table 8: Bond path, full period (75/25 start, bonds replacing stocks)

Bonds

Stocks

Annual return

Volatility

'Worst loss'

Sharpe

25%

75%

6.98%

11.83%

-42.01%

0.63

35%

65%

6.63%

10.40%

-36.94%

0.67

45%

55%

6.26%

9.01%

-31.49%

0.72

55%

45%

5.86%

7.68%

-25.64%

0.78

65%

35%

5.44%

6.44%

-19.37%

0.86

75%

25%

4.99%

5.36%

-17.44%

0.94

90%

10%

4.28%

4.29%

-16.74%

1.00

100%

0%

3.78%

4.19%

-17.52%

0.91


Table 9: Same 'worst loss', two ways (full period)

'Worst loss'

Managed futures needed

Return

Bonds needed (total)

Return

Managed futures advantage in return

about −36%

10%

6.92%

about 37%

about 6.56%

+0.36 pts

about −29%

20%

6.80%

about 49%

about 6.11%

+0.69 pts

about −22%

30%

6.64%

about 61%

about 5.63%

+1.01 pts

about −19%

35%

6.54%

about 66%

about 5.40%

+1.14 pts

about −16%

40%

6.43%

not reachable

n/a

n/a

about −10%

50%

6.17%

not reachable

n/a

n/a

Bond allocations are interpolated between 5% steps, so treat them as approximate.


Table 10: Same volatility, by era (30% managed futures vs. the bond mix required to achieve equal volatility)

Era

Annual Return (from MF @ 30%)

Volatility (from MF @ 30%)

'Worst loss' (from MF @ 30%)

Bonds at same vol

Annual Return (from bonds)

'Worst loss' (from bonds)

2000–2009

5.17%

8.35%

-22.2%

about 52%

about 4.12%

about −27.3%

2010–2019

6.55%

7.25%

-9.8%

about 43%

about 7.89%

about −9.7%

2020–2026

9.01%

8.34%

-9.1%

about 67%

about 4.97%

about −18.3%




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