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.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons.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.