Sukuk and green bonds’ role in global macro portfolio diversification: evidence from covid-19 crisis

Covid-19 distress has awakened and reinforced some long-standing trending topics related to portfolio risk management and systemic risk mitigation. Portfolio managers have started to test flexible multi-asset portfolio strategies (Global Macro Strategies) based on the interpretation of large macroeconomic conditions, including the asset allocations of long and short positions in equities, bonds, commodities, etc. This study aims to test the risk-adjusted contribution of Sukuk (Islamic bonds) and Green Bonds as alternative instruments compared to conventional fixed-income, covering the last Covid-19 crisis. The asset allocation is designed following the fundamentals of Global Macro and solving a risk-parity optimisation problem using a specifically developed MATLAB™ algorithm. The findings will provide insights into the testing hedge and safe-haven power of Sukuk and Green Bonds, contributing to the widening literature on portfolio risk management and developing an alternative asset allocation functional with Global Macro fundamentals.