Alternatives can help diversify a wider set of macro shocks while adding potential income and return sources that public assets may not provide.
In Brief
- With inflation uncertainty and higher stock–bond correlation risk, portfolios may need diversification beyond public equities and bonds to better withstand stressed periods like 2022.
- Alternatives can diversify a wider range of shocks (weak growth and high inflation) while providing additional income streams and potential alpha, complementing or substituting traditional assets depending on objectives.
- Manager selection is critical in private markets, where return dispersion is significantly wider than in public markets and outcomes depend heavily on picking effective managers.
Why Alternatives?
High stock-bond correlation suggests portfolio allocations beyond public markets.
While the classic 60/40 stock-bond portfolio has historically delivered positive returns in most calendar years, with gains in stocks offsetting loses in bonds and vice versa, challenging years like 2022 remind investors that a well-diversified portfolio should not consist of only public stocks and bonds. Against the backdrop of lingering inflation risks and stock-bond correlation still that may be in a regime shift, investors should look beyond traditional markets for diversification.
Which Alternatives?
Alternatives offer diversification, stable income and growth.
Alternatives offer a means to increase diversification within a portfolio and diversify a wider range of shocks (i.e. both weak growth and high inflation), as well as offer additional income streams and enhanced alpha return. Alternatives can be used to complement or replace the desired portfolio characteristics that can’t be found in public markets.
The characteristics of various alternatives can be used to substitute, or complement, those of traditional public assets, based on what best fits the ultimate investment objective of the portfolio.
Whose Alternatives?
Manager selection is crucial as potential returns can vary significantly.
This slide illustrates that the range of returns for private investment managers is much broader than for public investment managers, highlighting the importance of selecting an effective manager to unlock the return-enhancing potential of alternatives.