Framing the History of Alts and Asset Allocation Through Football

Through the lens of football, we can frame the evolution of asset allocation across three approaches:

The Old-Fashioned Approach: Only Offense and Defense

For decades, portfolios were built with just two squads on the field:

• Offense was stocks—driving growth and long-term compounding.
• Defense was bonds—providing income, lower volatility, and principal protection.

This 60/40 playbook worked well during eras of falling rates and reliably negative correlations between stocks and bonds. But the game has changed. Investors are concerned about stretched valuations in key asset classes. Interest rates have ratcheted higher. And inflation is unpredictable. As a result, stocks and bonds have become more correlated, meaning both assets may fall together, challenging portfolio diversification.

Challenges to 60/40 Today

• High Correlations: Recently, correlations between stocks and bonds have been consistently positive and have spiked during periods of stress.
• Uncertain Yields: Income on conventional fixed income has not always been adequate to cushion significant drawdowns.
• Elevated Valuations: Equity valuations, historically lofty with the Shiller P/E approaching dot-com era levels, may leave portfolios exposed.
• Elevated Debt Levels: Total debt, servicing costs, and future borrowing needs are looming headwinds for governments, businesses, and consumers.

60/40 Portfolio

The once-reliable 60/40 mix has become more vulnerable. In addition, public markets have shrunk relative to private markets, with the number of listed stocks cut in half in recent years. Combined, the vulnerability of traditional assets and shrinking public markets have forced advisors to look for new ways to balance risk, generate returns, and deliver the outcomes clients expect.

“The once-reliable 60/40 mix has become more vulnerable.”

At a Glance

• Offense = Stocks → Growth engine, equity beta, “risk on”
• Defense = Bonds → Income, stability, lower volatility, “risk off”
• Limitation: When both fall together as in 2022, portfolios take a bigger hit

The Alternative Formation: Adding Special Teams

As markets evolved, investors recognized that offense and defense alone weren’t always enough. Just as in football, special teams can change the outcome of the game.

In portfolios, alternatives became the special teams—offering potential diversification, uncorrelated returns, inflation protection, and fresh sources of returns. 50/30/20 became the new mantra of diversification and the successor to 60/40.

50/30/20 Portfolio

This expanded toolkit gave advisors more potential ways to defend against shocks and capture opportunities when stocks and bonds struggled. Strategies such as private markets, hedge funds, managed futures, real assets, or direct real estate offered return drivers that could move independently of traditional markets.

At a Glance

• Special Teams = Alternatives → Seeking diversification and resilience
• Examples: Managed futures, private markets, hedge funds, real assets
• Benefit: May help cushion drawdowns or deliver returns when traditional assets struggle

Next Step Needed

Offense, defense, and special teams all joined the investment huddle. But this approach has a major drawback. The risk/return profiles of alternative investments vary widely, from long or short, to liquid or illiquid, to hedged or unhedged, and easy to implement or operationally complex. Combining alts in one sleeve clouded risk/return profiles and diminished advisors’ ability to achieve precision in portfolio construction.

THE OPINIONS EXPRESSED ARE THOSE OF THE AUTHOR OR THE INDIVIDUAL TO WHOM THE STATEMENTS ARE ATTRIBUTED. WHILE BELIEVED TO BE REASONABLY BASED ON FACT AND INQUIRY, THERE CAN BE NO GUARANTEES THAT SUCH OUTCOMES EXPRESSED OR IMPLIED HAVE OCCURRED OR WILL INDEED OCCUR.

THIS DOCUMENT IS NOT A SOLICITATION FOR INVESTMENT. SUCH INVESTMENT IS ONLY OFFERED ON THE BASIS OF INFORMATION AND REPRESENTATIONS MADE IN THE APPROPRIATE OFFERING DOCUMENTATION. ANY INVESTMENT PROGRAM DESCRIBED HEREIN IS SPECULATIVE, INVOLVES SUBSTANTIAL RISK AND IS NOT SUITABLE FOR ALL INVESTORS. NO REPRESENTATION IS BEING MADE THAT ANY INVESTOR WILL OR IS LIKELY TO ACHIEVE SIMILAR RESULTS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.