The Need for Creative Diversification in Volatile Markets
The past three years have tested traditional portfolio diversifiers like long-dated treasuries. With rapid Fed rate hikes (2022), speculative rate swings (2023–2024), and a "higher for longer" outlook, bonds have faced significant challenges. Notably, the Bloomberg Aggregate Bond Index and S&P 500 saw 14 overlapping negative months between 2022–2024, with bonds contributing to nearly half the downside.
While bonds rebounded in February, multi-asset investors increasingly seek alternative strategies—active trading approaches using long/short positions—to mitigate correlation risks between stocks and bonds.
Key Insight: Alternatives reduce losses when stocks and bonds fall together.
Average monthly returns during stock downturns (2022–2025):
| Strategy | Avg. Return |
|--------------------|-------------|
| Alternatives | +2.1% |
| Traditional Bonds | -1.8% |
Evaluating Alternative Strategies: A 3-Step Framework
1. Correlation Analysis
Prioritize strategies with low correlation to equities, the primary volatility driver in multi-asset portfolios.
2. Rolling Return Assessment
Seek consistent returns above cash over extended periods. Historical data reveals resilience in strategies like managed futures and market-neutral funds.
3. Volatility-Adjusted Sizing
- High volatility: Smaller allocations (e.g., bitcoin) due to outsized impact.
- Low volatility: Larger allocations (e.g., gold) for steady diversification.
👉 Explore how volatility impacts allocation decisions
Bitcoin and Gold as Portfolio Diversifiers
Performance Highlights (2022–2025 YTD)
- iShares Gold Trust (IAU): +40%
- iShares Bitcoin Trust (IBIT): +40%
Correlation Benefits
| Asset | 10Y Correlation to S&P 500 |
|------------|----------------------------|
| Bitcoin | 0.15 |
| Gold | -0.01 |
Both assets act as geopolitical hedges with low equity ties, despite high volatility.
Implementing Alternatives: Funding and Allocation
Funding Sources
- Fixed Income: Most alternatives (e.g., gold, low-correlation strategies).
- Equities: Bitcoin (due to extreme volatility).
Model Portfolio Adjustments
BlackRock’s Target Allocation team recently:
- Increased liquid alternatives.
- Added gold/bitcoin, funded primarily from fixed income (except bitcoin, sourced from equities).
Pro Tip: Small bitcoin allocations yield significant diversification due to high volatility.
FAQs
1. Why diversify beyond traditional bonds?
Bonds have struggled with rate volatility, while alternatives offer uncorrelated returns during equity downturns.
2. How much bitcoin should a portfolio hold?
Even 1–2% can impact diversification; its volatility demands cautious sizing.
3. Is gold still relevant?
Yes—its negative stock correlation and stability make it a timeless hedge.
👉 Learn more about optimizing alternative allocations
Looking Ahead: Alternatives in a "Higher for Longer" Era
With persistent inflation and robust growth, Fed rate cuts seem distant. Alternatives may outperform "cash plus" strategies, offering:
- Lower equity correlation.
- Enhanced risk-adjusted returns.
Final Thought: As portfolio risk rises, so does the need for diversifiers like bitcoin, gold, and liquid alternatives.