All three hedges investors rely on—long government bonds, gold and managed futures—failed to protect portfolios in 2025. Rising yields, gold’s newfound tie to tech stocks and weak CTA returns erased the usual offsets, leaving few obvious shelters until geopolitics, liquidity and trader behavior clarify.

What broke: bonds, gold and the CTA squeeze

Investors expect long-term government bonds to rally when growth worries spike. That didn’t happen: 10-year Treasury yields rose while UK gilts and German bunds traded at multi-year highs, removing the negative correlation investors count on.

Gold, long viewed as an inflation or conflict hedge, hasn’t behaved as a safe haven. Matt Orton, head of advisory solutions and market strategy at Raymond James Investment, says gold’s price movements have recently tracked technology stocks, so when equities swing, gold has followed instead of offering protection.

Managed futures, often packaged as mechanical, trend-following hedges, also disappointed in 2025. CTAs were among the worst-performing hedge fund categories, prompting allocators to question whether they can be relied on in a crisis. Jon Caplis, founder and CEO of PivotalPath, notes that investors sometimes conflate managed futures with global macro funds despite important differences in how they operate.

Why the usual protections failed

Three drivers explain the breakdown:

  • Geopolitical shock: disruptions pushed energy prices higher, sometimes amid confusing, partial reopenings of key transit routes such as the Strait of Hormuz. Iran publicly denied negotiations even as limited ship transit occurred.
  • Structural shift in rates: rising long-duration yields reduced bonds’ ability to serve as a negative-correlation offset to equities.
  • Limits of mechanical strategies: CTAs and other systematic trend-followers underperform when markets move erratically or reverse before a trend can be exploited, while discretionary managers can reposition based on macro reads.

Energy assets have been the clearest shelter during these dislocations—an uncomfortable concentration of risk for diversified portfolios. When energy rallies and bond yields rise simultaneously, conventional hedges can cancel each other out. And when gold tracks equities rather than acting as an inflation or conflict hedge, portfolios can see losses across multiple asset classes at once.

Paul Zummo, chief investment officer at J.P. Morgan Alternative Asset Management, summed up the dilemma: “Can they be there when you need them?”

How market mechanics and behavior matter

The failure of hedges reflects deeper market mechanics and human behavior that create both edges and blind spots. Independent writer Ryan Swright outlined four forces that generate tradable edges—behavioral inefficiencies, structural mechanics, informational gaps and analytical differences. Each can produce temporary mispricing, but they can also align in ways that negate tradable edges and leave systematic strategies exposed.

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Paul Zummo, chief investment officer at J.P. Morgan Alternative Asset Management, asked: “Can they be there when you need them?”

This article was created with AI assistance.