Geopolitics, inflation, and Fed policy have agitated financial markets in 2022, leaving returns and diversification in short supply. Figure 1 shows just how challenging the results have been. Over the last several decades, global equities and bonds have provided some level of diversification. When equities have done poorly, bonds have often helped to compensate — and vice versa. But thus far, 2022 has been a rare exception, with both equities and bonds suffering drawdowns.
Looking back prior to the period in the chart, the only calendar year we found with simultaneous and similarly steep declines in equities and bonds was 1974 (a year marked, perhaps not coincidentally, by an energy shock). While we don’t know whether 2022 will end on a similar note, it seems clear that recent developments, from the end of central banks’ “easy money” policies to the beginning of a multiyear deglobalization trend, are likely to contribute to greater economic uncertainty and market volatility. In this new world, we believe alternative investments could play a vital role in improving portfolio resilience and returns. With that in mind, we want to focus on three topics we think alternatives allocators should consider: rising market dispersion, the equity-leadership transition from growth to value, and the need to break down “silos” in alternatives portfolios.