Case Study — Honest Assessment
The 2022 Rate Shock
2022 broke the 60/40 portfolio. Bonds and equities fell simultaneously for the first time since the 1970s. This is RegimeR's most challenging episode — and the reason we publish our weaknesses alongside our strengths.
When diversification failed
Central banks worldwide raised rates at the fastest pace in decades to combat post-COVID inflation. The US 10-year yield rose from 1.5% to 4.2%. Long-duration bonds — the traditional safe haven — collapsed. The iShares 20+ Year Treasury ETF lost 31.2% in a single year.
Equities fell simultaneously. The S&P 500 lost 18.2%. A standard 60/40 portfolio lost approximately 16% — the worst year since 2008 and the first year both legs of 60/40 declined together since the 1970s.
This was not a credit crisis. Credit spreads were moderately elevated but never reached the extreme levels that trigger a Contraction regime. The system correctly classified 2022 as a Transition environment — not a Contraction.
What RegimeR delivered
RegimeR outperformed the 60/40 benchmark in every region but still lost money in the US.
| Region | 60/40 | RegimeR | Preserved | Context |
|---|---|---|---|---|
| US | -24.2% | -15.6% | +6.0pp | Fed hiking cycle, TLT −31% |
| AU | -20.3% | -13.7% | +3.3pp | RBA tightening, commodity buffer |
| DE | -31.6% | -18.4% | +10.0pp | ECB + Russia-Ukraine energy shock |
| GB | -21.0% | -5.3% | +13.1pp | Truss/Kwarteng mini-budget, LDI unwind |
What we learned
The US result (−15.6%) shows the system's limitation: when the regime is correctly classified as Transition (not Contraction), the portfolio still holds duration exposure. In a rate shock that doesn't trigger credit stress, that duration exposure hurts.
The system outperformed the 60/40 benchmark by 8.6 percentage points in the US. But it did not avoid losses entirely. No regime-based system can protect against a risk type (simultaneous rate-driven bond-equity drawdown) that has no precedent in the classification training window.
Germany was hit hardest (60/40 at −31.6%) due to the combined impact of ECB rate hikes and the Russia-Ukraine energy shock. RegimeR preserved 10.0 percentage points.
The UK result (+13.1pp preservation) reflects the region-specific basket that excludes UK gilts from defensive allocations — a structural insight validated using historical data that included the 2022 period.
Why we publish this
2022 was a novel risk type for any regime-based system. The 6.0:1 net preservation ratio is calculated across all 13 episodes, including 2022.