Fixed Income Securities as a Hedge against Equity Market Downside

Sammanfattning

Investors are constantly searching for ways to protect their wealth, ideally without losing out on long-term returns. To achieve this, some investors choose to diversify their equity portfolios with fixed income assets, believing they can protect their portfolios from drawdowns. However, the current literature is divided on the effectiveness of fixed income assets as a shock-absorber during severe equity drawdowns. This thesis analyzes sub-classes of fixed income assets to understand if they mitigate downside risk as part of a multi-asset equity portfolio. The results of this thesis show that investors cannot rely on simple heuristics to decide whether to include fixed income or not for this purpose. While some findings support the effectiveness of fixed income, the results are divided. Overall, this paper supports the claim that fixed income can act as a shock-absorber for equity portfolios, in particular government bonds and some investment-grade corporate bonds. This thesis was written in collaboration with Citroneer AB as the concluding part of a bachelor’s degree at Lund University School of Economics and Management.