Invesco ran a commercial on CNBC for liquid alternative funds with the tag line “goodbye 60/40, hello 50/30/20” with the implication being 50% to equities, 30% to fixed income and 20% to alternative strategies.
Where alternatives used to be more about reducing volatility, the conversation is shifting to include bond market substitutes due to what seems like an increased likelihood of lower for longer for interest rates.
It is a positive that the conversation is expanding and presumably more market participants are taking the time to learn about alternatives. I am pretty skeptical that a 20% allocation is the answer. Back in the middle of the financial crisis a reader left a comment on the Seeking Alpha version of one of my posts that essentially advised putting it all into Hussman and not worrying about it. While it is debatable as to whether Hussman counts as alternative, his strategy is obviously not straight buy and hold of an equity portfolio. I was consistent to point out that the equity market was not permanently broken and I don’t think the bond market is now permanently broken. Too much in alternatives and pretty soon it is the equity and bond exposure that is the alternative.
There are segments of the bond market with more than adequate yields but they are volatile so in the context of 60/40 you probably don’t want 40% in the parts of the bond market that are almost as volatile as the equity market. But you probably want some in those segments and you probably want more than you would have considered 15 years ago but not 40%.
I am of the opinion that some portion of a fixed income portfolio needs to be in the low yielding stuff to help offset/manage the increased volatility from the higher yielding stuff. Things like market neutral, absolute return, hedge fund replication and managed futures can play a role in between those two extremes in terms of offering the potential for bond like volatility (most of the time) with a total return that equates to an adequate yield.
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