Comments from the Fed suggesting that it may slow its quantitative easing programme have seen sharp falls in both equities and bonds.
Opinions differ on whether the fall in prices is a short-term correction or represents the bursting of a bubble.
FE Alpha Manager Ian Spreadbury says recent volatility in the markets shows that investors are still highly reliant on easy money, meaning that central banks will be unable to step away from QE until there is much stronger growth in the economy.
"I think it is very difficult to exit from QE; ultimately, the markets have demonstrated in the last few weeks that any sniff of tapering or reduction of QE has led to some reasonable hikes in rates," Spreadbury said.
"Certainly on a two-year view there is an 80 per cent chance of QE continuing or even increasing," he added.
Others say the spike in volatility is a sign the asset class as a whole is about to crash, with Darwin’s David Jane telling FE Trustnet that over-inflated bond prices will now correct.
"The end of the bond bubble, which we have been warning about for some time, seems to be happening," Jane said.
Whoever is right, investors need to adapt their portfolios to the challenge, and there are some managers who have found ways to make money from it.
Gavin Haynes (pictured), managing director at Whitechurch, says that James Hanbury’s £555m Odey UK Absolute Return fund sits in that category.
"Odey UK Absolute Return has a short on 10-year US Treasury yields, so he is betting on their prices to drop," he said. "It has been a successful place to be over recent months, as 10-year US Treasury yields have gone from their lows of 1.7 per cent up to 2.2 per cent this week. Although that may not seem like much of an increase, it is a significant shift."
As well as having a short on US Treasuries, Hanbury has also taken a short position on 10- to 15-year gilt futures and German Euro Bund futures.
According to FE Analytics, Odey UK Absolute Return is the top-performing fund in the IMA Targeted Absolute Return sector over three and six months, and one and three years.
The fund has made positive returns over every calendar year since its launch in May 2009. That cumulative performance means it has returned 143.29 per cent since its inception, while its benchmark – the FTSE All Share – has returned 69.77 per cent.
Performance of fund vs index since May 2009
Source: FE Analytics
Although the fund has short positions, it is predominantly made up of equities.
Odey UK Absolute Return has an ongoing charges figure (OCF) of 1.45 per cent and requires a minimum investment of £5,000.
Haynes also highlights William Littlewood’s Artemis Strategic Assets fund.
"Artemis Strategic Assets is another fund that is actively betting against bond prices. Littlewood has had this view for quite a long time and he certainly sits in the inflationary camp. He has active short positions because he feels interest rates are going to go up."
Littlewood has taken short positions on US, French, UK and Japanese government bonds, and in his most recent note to investors said this will remain unchanged for a while to come.
"Our bond-shorts are equivalent to 98.6 per cent of the fund. Our maximum allowable position is 100 per cent and given my view that bonds are grotesquely overvalued, I expect the fund to maintain a high 90s per cent position until bond yields go significantly higher," he said.
The £866m Artemis Strategic Assets fund was launched in May 2009 and has returned 53.59 per cent since then, compared with 48.45 per cent from the IMA Flexible Investment sector.
Performance of fund vs sector since May 2009
Source: FE Analytics
Littlewood’s negative view on sovereign debt has hindered the fund’s performance in the past. This was shown in 2011 when government bonds rallied and Artemis Strategic Assets lost 7.62 per cent.
The four crown-rated fund requires a minimum investment of £1,000 and has an OCF of 1.59 per cent.
Cazenove’s Robin McDonald (pictured) recently told FE Trustnet that he holds the offshore regulated F&C Macro Global Bond fund in his Cazenove Multi Manager Diversity portfolio because he sees it as an "anti-bond" play, given its numerous short positions.
"This fund has taken the view for the last 18 months that the sovereign bond market is massively overvalued, and has been outright shorting it. Soon this will be the only bond fund worth holding," he said. F&C Macro Global Bond has been run by Paul Thursby since its launch in October 2003.
Thursby is maintaining a large short on developed government bonds as he feels a bubble in the asset class is about to burst.
"The recent abandonment of austerity by policymakers, and the consensual view that more policy easing in the form of bond-buying by the central banks has run out of road, leads us to believe that we are getting ever closer to the day of reckoning for the bond market, as governments continue to break taboos and debate ever more desperate measures to secure sustainable growth," he said.
Since the £405.3m fund was launched, it has returned 64.21 per cent.
However, it has underperformed against its composite benchmark – made up of the 50/50 Citigroup World Government Bond index and FTSE All Government Bond Stocks index – which has returned 75.42 per cent.
His approach has worked so far this year, with the fund returning 1.89 per cent while its benchmark has made 0.13 per cent.
Performance of fund vs benchmark year-to-date
Source: FE Analytics
The fund has an OCF of 1.19 per cent and requires a minimum investment of £5,863.
