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Time to Diversify – But into What?

The case for diversifying out of equities, and the role of liquid alternatives

Topics - Alternative Investing Asset Allocation Portfolio Risk and Performance

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Time to Diversify – But into What?

The last 10 years were exceptional for traditional stock/bond portfolios. But with stock market valuations near all-time highs and bond yields near all-time lows, prospective returns look bleak.

Many investors – though not all – are looking to diversify away from equity risk. We believe this should be viewed as a strategic rather than merely a tactical goal. Market timing is difficult, and expensive markets can keep rising, but better diversification is a worthy strategic aim, and if equity markets are riding high, so much the better.

This begs the question, diversify into what? Many “alternatives” share the same underlying tail risks related to the state of the global economy, including private equity, real estate, credit, and anything with implicit exposure to equity and credit risks. The next market drawdown may not be as fleeting as the crash of March 2020, and the recovery may not be so rapid. Liquid alternatives can be powerful diversifiers in unfavorable market environments and may be a valuable addition to the investor’s diversification toolkit.

 

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The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.

 

Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.

 

Diversification does not eliminate the risk of experiencing investment loss.

 

Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.

 

AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.