Alternative diversifiers: Rethinking diversification in investment portfolios

Stock and bond prices don't always move in opposite directions. How can investors reduce their reliance on bonds in offsetting equity risk?

In 2021 the stock-bond correlation flipped to positive after remaining negative for a majority of the preceding 20 years. This came as a surprise to some investors who had been lulled into complacency, believing that their bond allocation could reliably provide downside management in any risk off event and serve as the primary risk stabilizer in their portfolios. For the last three years, equity and bonds have been losing and gaining value in tandem; bonds have not been helping with drawdown reduction. In this paper we discuss:

1. Equity-bond correlations through history and the impact of changing correlations on portfolio expectations
2. Alternative diversifier strategies as a source of downside management
3. How alternative diversifier strategies can act as a complement to duration and have historically improved portfolio outcomes