Over the past decade, and arguably for most of the 21st century thus far, risk assets have been rallying, with any pullback providing an opportunity to load up with more purchases (“buying the dip”), effectively taking advantage of central banks’ put option.
Concurrently, diversification through a balanced portfolio of equities and bonds has benefited from low or negative correlation between these two asset classes. This has fed through to a long and durable bull run in both equity and bond markets.
This “buy the dip” era and the bond/equity powerhouse of strong returns and low correlations were a manifestation of an ever-lower interest rate environment, minimal inflationary pressures and loose fiscal policy post the Global Financial Crisis. However, if you go back further, to the period that spanned the late 1960s to the turn of the century, this negative correlation was reversed – i.e. correlation between equities and bonds was strongly positive.
Every market paradigm has a lifespan
From our view, we now appear to be shifting towards a very different world, where the trend of onshoring, self-interest and a higher r* (R-star) rate of interest prevail. This is leading to concerns about the risk of higher inflation, the path of interest rates and global growth, with consequent impacts on corporate decisions, from freezes on recruiting to pauses in capital spending.
Just consider senior management Q4 earnings calls’ outlook statements, with many companies removing forecasts altogether:
In addition, we see concerns about the ability of governments to fund their staggering long-term debt obligations, with yields on longer duration bonds rallying recently – more so since US President Donald Trump’s “Big, Beautiful, Bill” received approval.
The US dollar is no longer seen as the safe haven asset it used to be (the trade-weighted US dollar index has fallen steadily from its peak in early January).
At the same time, the move to private, more opaque markets is increasing, just as the pioneers of that trend – Yale and Harvard for example – are selling down their positions.
Given such indecision and uncertainty, it seems appropriate to consider the future path for risk assets, particularly at a time when the MSCI All Country World Index is setting all-time highs, following its pullback in April, despite continued tariff uncertainty.
Global equities have rebounded from tariff uncertainty to hit record highs
Source: Bloomberg, Janus Henderson Investors, 9 July 2020 to 8 July 2025.
Past performance does not predict future returns
However, behaviour takes time to catch up. “Buying the dip” has been the cornerstone of some investors’ entire careers. It also seems to be driving the herd mentality in some retail areas – note the rally in the S&P 500 following President Trump’s “buy equities now” call. The need to wean investors off this addiction of doubling down is now urgent, as the confidence interval around any forward-looking economic indicators or market outlook is wider than ever.
The need for the investment management industry to promote diversification in client portfolios is paramount to help secure their financial futures. Investors have arguably over-earned through this glorious period for risk assets. The need to re-invest those excess returns in asset classes that demonstrate a robust as well as lowly correlating return is more important than ever.
This recent period of market volatility and investor uncertainty has generally been a positive one for liquid alternative strategies, and the landscape continues to improve:
• While implied volatility spiked sharply on “Liberation Day” – positive for diversifiers as the bellwether VIX fear gauge reached an intraday high of 60.3 in April, its highest level in eight months. It has since collapsed to nearer 16.0. The cost of option protection against market volatility has also normalised. These mean that the cost of protection against market volatility spikes has reduced.
• When providing liquidity to trading markets, such as block trades and secondary offerings, discounts have widened, leading to the potential for price pressure strategies to deliver higher returns as risk premia is now wider.
• An orderly initial public offering market looks to be resurfacing, with companies performing strongly on their debut. This should unlock private equity supply as they seek to monetise their inventory and return capital to investors.
• Convertible new issuance is increasing as chief financial officers realise they can pay cheaper coupons than with straight debt, which they are having to issue to refinance maturing loans that were originally issued in a lower interest rate environment.
• Regulation is easing for mergers and acquisitions, which should lead to increased opportunities for event-based strategies.
Strategies for a changing market
The term “alternatives” encompasses a wide range of non-traditional assets, with differentiated drivers of performance, capable of flourishing in a wide range of distinctive market conditions. Trend-following and commodities strategies, for example, have historically been two areas that do well during periods of higher inflation.
Alternatives offer investors a rich environment of potential tools (strategies) that can add meaningful diversification to a broader balanced strategy, potentially critical at a time when formerly reliable market dynamics are breaking down, and the relationships between asset classes are changing. This is the kind of environment where investors are going to be looking for areas that differentiate themselves from the mainstream.
David Elms, head of diversified alternatives and Carlo Castronovo, portfolio manager, Janus Henderson Investors
