The recent sharp sell-off in global equity markets has focused investors on the importance of holding diversifying investments that can help mitigate volatility and potentially cushion their portfolios during times of market stress. Given their unique nature, alternative investments are proving to be useful tools to help investors weather the current market storm.
As the chart1 below illustrates, a basket of alternatives — based on Invesco’s alternatives framework as explained in my previous blog post How to approach the alternative investments puzzle — has historically delivered equity-like returns with low levels of volatility (as measured by standard deviation) and lower maximum drawdown.
Alternatives have historically helped investors manage market volatility
Bull and bear market performance
If we drill down a little further to look at alternatives’ performance during different parts of the market cycle (see the chart1 below), you can see that alternatives have historically outperformed equities during periods of equity weakness, while equities have historically outperformed alternatives during periods of equity strength. This has proven to be the case: Alternatives lagged equities during the post-crisis bull market, while they have outperformed equities on a year-to-date basis in 2015.2
Alternatives have historically outperformed during bear markets