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Notes -
The idea of the bond allocation is that bonds tend to do well relative to stocks when the economy is not doing so well, like in 2008 or 2001-2002. The problem is this failed massively in 2022.
Hmm but there have been many notable hedge fund failures of supposedly safe strategies, notably the collapse of LTCM.
"The market can remain irrational longer than you can remain solvent." That's LTCM in a nutshell.
There's no such thing as an omni-safe investment. What you have in the strategies employed by firms like LTCM are situations that, when identified, have a very high if not perfect chance of doing exactly one thing eventually.
LTCM modeled spread convergences. You can look up the mechanics on your own. The problem is that in order to take advantage of this strategy, LTCM had to pay what amounted to insurance payments until the spread did, in fact, converge. The longer that doesn't happen, the more you pay. And if you're liquid capital dries up, sucks to be you - even if you turn out to be right! Additionally, LTCM eventually succumbed to the attraction of using leverage when the spreads themselves started too narrow. Leverage amplifes both returns and losses so if the spreads stopped narrowing and widened, even just a bit, LTCM would potentially be blown up - which is what happened during the 90s Russian debt crisis.
All of this is to say that even the risk-free rate of return (most often 10yr or longer Treasury Bonds) isn't static and isn't actually risk free if you layer it with leverage, derivatives, etc.
In terms of hedge funds "calling their shots" - I didn't mean to imply hedge funds sell "safe" strategies or that they always hit their anticipated performance. This is actually one of the brutal realities of the industry - if you're a senior analyst or a portfolio manager and you miss your targets even for one year, there's a really, really good chance you will get fired and, at best, only be able to find a new job a step down from where you were. While hedge fund compensation is pretty insane, it's a lot like professional sports in that you might only make it for 3,5,10 years before being close to unemployable. A lot of blowout types tumble down to financial consulting or fair valuation opinions or just market analysis and equity research. Still (mid to high) six figure jobs, but a far cry from some of the 7/8/9 (it happens) figure payouts people see in single years.
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