Opportunities in Liquid Alternatives
The current macroeconomic landscape presents a set of challenges that demand a fresh approach to portfolio construction. Elevated uncertainty, particularly regarding the trajectory of inflation and the sustainability of high valuations in equities and credit, is reshaping return expectations and asset correlations. The traditional 60/40 stock-bond portfolio, which thrived over the past decade due to strong returns and a favourable diversification effect, now faces structural headwinds. Investors must adapt to this evolving paradigm by considering alternative strategies that can provide diversification and uncorrelated sources of return.
One of the defining characteristics of today’s environment is heightened macro uncertainty. A key indicator of this is the growing dispersion in economic forecasts, particularly around inflation. Since 2020, estimates have diverged significantly, reflecting a regime shift where consensus on key macro variables is becoming increasingly elusive. Structural supply constraints, geopolitical fragmentation, demographic shifts, and the transition to a low-carbon economy are expected to contribute to a more volatile inflationary environment. Most market participants anticipate inflation to be more erratic, with potential resurgence in 2025, challenging the predictability that investors have relied on in the past to build their portfolios.
Also, across different asset classes—both traditional and alternative—various valuation metrics indicate elevated levels compared to historical norms, raising concerns about future return potential. Equity markets, particularly in certain sectors, continue to exhibit high price-to-earnings ratios, while credit spreads have tightened significantly, offering less compensation for risk. These expensive valuations increase the likelihood of market volatility and limit the prospects for strong forward-looking returns. This environment reinforces the need for investors to look beyond traditional asset classes and even within alternatives to identify strategies that can deliver meaningful diversification and attractive risk-adjusted returns.
Given this backdrop, how should investors position themselves? Many seek to be more dynamic with index strategies, attempting to time the market or tilt exposure toward favourable sectors, regions, and styles. However, we at Farview remain sceptical of this approach, particularly in an environment where macroeconomic predictability is diminished. Instead, we advocate for a diversified portfolio construction framework that incorporates alternative sources of risk premia and allocates capital to niche strategies driven by bottom-up opportunities to complement index strategies.
Important to consider that alternatives encompass a broad array of asset classes, and some exhibit high correlations and beta to traditional asset classes. To be effective in achieving true portfolio diversification, an alternative allocation must be meticulously crafted and actively managed. For instance, private debt, while often classified as an alternative investment, has a strong correlation to equities—around 0.8—and therefore provides limited diversification benefits. Investors must carefully assess the role of each alternative strategy in the portfolio to ensure it adds genuine value in terms of risk mitigation and return enhancement. At Farview, we build portfolios to achieve specific portfolio outcomes, and our strategy, Farview Global Alpha, is designed to provide diversification to an equity and bond portfolio.
The case for alternatives is particularly strong in the current environment. Rising interest rates, increased market uncertainty, lower equity correlations, and greater dispersion in company-specific return drivers all contribute to a rich opportunity set for alternative investment strategies. Additionally, the increase in corporate restructurings and M&A activity has expanded the scope for event-driven and opportunistic macro investing. These conditions have already been reflected in the strong performance of alternative strategies over the past 18 months, underscoring their effectiveness in navigating this new regime.
For these reasons, the traditional 60/40 portfolio model may need to evolve into a more diversified framework—such as a 50/30/20 approach, where 20% is allocated to alternatives. This shift can enhance portfolio resilience, reduce reliance on traditional assets, and improve overall risk-adjusted returns in an environment where conventional diversification strategies may no longer suffice.
In this uncertain world, investors must embrace a broader toolkit that goes beyond traditional asset classes. We believe a well-crafted liquid alternatives solution offers not only important portfolio diversification through the exposure to differentiated return streams, but also the ability to capitalize on the inefficiencies and opportunities created by today’s complex and rapidly changing market environment.
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