Head of Client Solutions, David Horsburgh, explores the role that alternatives can play in managing portfolio volatility. He delves into the characteristics across credit and fixed income alternative assets and how they differ from traditional investments in delivering alpha to investors.
Across asset classes, volatility and high cross-asset correlations have been making portfolio diversification more challenging. Specific macro factors such as high inflation, rising interest rates, and geopolitical tensions have created a headwind for allocators looking to maximise their risk adjusted returns.
The basis of modern portfolio theory is that by combining assets (diversifying) you can reduce the volatility ‘cost’ on returns, allowing portfolios a higher chance of consistent outsized gains. Historically investors have done this by combining equities and bonds, though increasingly non-traditional and alternative strategies are playing a role in allocations.
A regime shift
Volatility has been on the rise as we shift away from a zero-interest rate policy and high levels of quantitative easing. This, combined with higher correlations has meant a significant shift up in portfolio volatility.