The exception to this rule is when a recession coincides with persistent inflationary pressures. Why? Bond prices tend to appreciate during growth slowdowns as central banks cut interest rates to support the economy-which provides a ballast during equity sell-offs. If inflation stays elevated longer than the market expects, the expectation for a negative stock-bond correlation could become less reliable, meaning that stocks and bonds may once again fall in lockstep. This is especially important as the path of inflation and economic growth remains uncertain. As a result, long/short strategies can provide a defensive return stream that has the potential to work best when equity markets sell-off-offering downside protection without relying on duration 4 as a ballast. Figure 2 shows the quarterly performance of the equity long/short sleeve within SMS, which has delivered durable returns with a -0.41 correlation to the S&P 500 during down months.įigure 2: SMS takes a “defensive” approach to navigating market downturns Quarterly performance of the S&P 500 and the Defensive Equity Long/Short sleeve within SMSīy combining multiple differentiated return sources, alternative strategies can target a balanced return profile with a low correlation to other asset classes and even other alternatives. Security dispersion is a return dynamic that is disconnected from the direction of markets and tends to be more pronounced in highly volatile or downward trending markets. Alternatives can capture these cross-sectional opportunities using a long/short framework 3 that goes long companies who are expected to outperform and short companies who are expected to underperform. For example, higher rates can increase the gap in performance between highly levered companies and those with less debt on the balance sheet. Higher rates can influence security dispersion, or the divergence between the best and worst performing assets. the Bloomberg US Aggregate Bond IndexĪlternatives can unlock new return sourcesīeyond fixed income, alternatives can tap into other opportunities arising from higher rates that aren’t found in the traditional 60/40 construct. The strategy has continued to out-yield US bonds as yields have increased over the course of the Fed’s hiking cycle (Figure 1).įigure 1: What’s good for bonds can be better for alternatives Yield-to-maturity of the BlackRock Systematic Multi-Strategy Fund (BIMBX) vs. BlackRock Systematic Multi-Strategy (“SMS”), for example, seeks market upside participation by investing in a diversified portfolio of fixed income securities. Many alternatives have “cash plus” 2 return targets, meaning that they may have the potential to capitalize on higher yields to generate higher returns. One aspect that may be overlooked by investors is that similar to bonds, alternatives can also benefit from higher rates. Rising interest rates have boosted the appeal of bonds which now offer an attractive source of income for the first time in years.
Alternatives can capture the same yield opportunities found in traditional fixed income, while unlocking new return streams and providing the ballast that’s needed in portfolios today. This brings into focus the role of alternative strategies as an additional source of diversification and returns in portfolios. This begs the question: are bonds back? Yields are back, but bonds may struggle to deliver the level of diversification that they once provided as inflation and policy uncertainty persist. Now, the magnitude of rate increases is slowing and yields have reached more compelling levels-potentially creating a better backdrop for bonds in 2023. The effectiveness of the traditional 60/40 portfolio, and the ability of bonds to act as a buffer during equity sell-offs was virtually erased. The US Federal Reserve’s (“Fed’s”) aggressive response to persistent inflation and the resulting recession risks created a challenging environment for both equity and bond investors. Alternative strategies like the BlackRock Systematic Multi-Strategy Fund can take advantage of higher yields and differentiated return streams while providing an added layer of diversification in portfolios.Ģ022 marked the shift to a new regime characterized by greater macroeconomic uncertainty and volatility.
Now, higher yields have boosted the appeal of bonds, but inflation and policy uncertainty may continue to undermine the diversifying properties of traditional fixed income.Throughout 2022, the Fed’s policy response to inflation and the resulting recession risks created a challenging environment for the traditional 60/40 portfolio 1 of stocks and bonds.
0 kommentar(er)
