The 60/40 portfolio needs to be redesigned. What to do now.


For decades, investors have relied on the so-called 60/40 portfolio – a mix of 60% stocks and 40% bonds, or something close – to generate sufficient stable growth and income. to achieve their financial goals. It did not disappoint, producing a total return of around 9% per year.

However, with soaring inflation and rising interest rates, an overhaul may be in order. Indeed, stocks and bonds tend to fall in concert in a high inflation environment, leaving no place to hide. “High and rising inflation can be kryptonite for traditional asset classes,” says Phil Huber, chief investment officer of Savant Wealth Management and author of The edge of the allocator.

Adding alternative investments is one way to soften or counter the blow. Alternatives, or alts, have the potential to generate excess revenue and returns, or alpha.

Long the near exclusive purview of large institutions and very wealthy investors, alts refer to anything that isn’t a stock, bond, or money. They include hedge funds, private equity, real estate, infrastructure, private debt and digital assets. High minimum investments, long lock-up periods and sometimes onerous tax implications have generally made them unsuitable or unattractive for most retail investors.

Most “liquid alternatives” or liquid alternative funds were launched after the 2008 financial crisis to provide retail investors with portfolio diversification through exposure to alternative investment strategies such as private equity and mutual funds. speculative. They offer lower minimums than products aimed at professional and high net worth investors, and are easily traded, much like exchange-traded mutual funds.

The term liquid alts encompasses many different strategies. What they have in common is the use of hedge fund type strategies such as short selling and investing in asset classes other than stocks and bonds. Companies sell liquid alts through registered investment vehicles such as mutual funds, closed-end funds, and exchange-traded funds, providing at least daily liquidity at a much lower cost than private partnerships .

Liquid alts saw $28.86 billion in inflows in 2021, according to Morningstar. In its fifth annual industry report, Calamos Investments said that all Morningstar liquid alternative categories it reviewed in 2021 ended the year on a high note, despite a “wide dispersion in performance.”

Unlike most traditional mutual funds and ETFs, liquid alternative funds, such as

Abbey Capital Futures Strategy

(ticker: ABYIX) for managed futures contracts,

Stone Ridge High Yield Reinsurance

(SHRIX) for catastrophe bonds, and

AQR Diversified Arbitrage

(QDARX) for event-driven strategies – usually only offered through financial advisors.

Many investors view alternatives as fully liquid or fully illiquid structures, but Huber says the landscape isn’t so binary. He cites the example of interval funds. These are closed-end funds registered under the Investment Companies Act 1940 and available only through financial advisers.

Interval funds, so called because they are required to offer to redeem a certain percentage of shares at specified times or intervals, at a price equal to the net asset value (NAV) of the fund, offer a agreement between mutual funds or ETFs and illiquid private funds, he explains. They can be a good option for investors who want more diversification but prefer to avoid private funds. Some examples include Cliffwater Corporate Lending (CCLFX),

Stone Ridge Alternative Loans

(LENDX), and the

Versus Capital Real Assets Fund


Rather than choosing a single alternative, Huber recommends investors build “a set of a handful of strategies” in which they have conviction, and which ideally can provide “a source of uncorrelated returns to the rest of your portfolio. “. He advises allocating at least 10% of a portfolio to alternatives, as anything less “won’t move the needle enough to make a difference or impact.”

As with most investments, caveat emptor also applies to variants. Lack of liquidity is a concern, as are fees. The underlying assets of many liquid hedge funds are not as liquid as most stocks and bonds. “You have to accept the fact that there might be times when you can’t have that liquidity in your wallet,” says Sam Monfared, vice president of the research team at Preqin.

Michael Rosen, managing partner and chief investment officer at Angeles Investments and Angeles Wealth Management, is hampered by both high fees and the wide performance dispersion of liquid alternative funds. “We’re in what most people expect to be a low yield environment for years to come,” he says. “The higher fees charged by alternative investment managers will significantly reduce the net returns investors receive.”

Liquid alternative funds carry fees ranging from 1% to 2.5% of assets, well above the fees charged by exchange-traded funds.

When it comes to performance dispersion, some context helps. The difference in performance between a top quartile fixed income manager and a bottom quartile fixed income manager is measured in tens of basis points (hundredths of a percentage point), while the difference between Top-quartile and bottom-quartile public stocks are measured in 50 to 100 basis points, Rosen said.

“But the difference in private equity between the top quartile and the bottom quartile is measured in 1,000 basis points, an order of magnitude,” he says. “That means the penalty for not investing in a high performing, above average private equity manager is huge. I’m not convinced that retail investors will be able to access these top performing funds.”

John Bowman, executive vice president of the CAIA Association (short for Chartered Alternative Investment Analyst Association), also points to the wide dispersion of access. “It’s not an asset class where beta, as we think, is easily accessible,” he says, referring to the sensitivity of a stock portfolio to stock market movements. “It’s still an alpha-driven set of asset classes, rich in manager selection and demanding.”

He would like more investors to have access to “the full range of risk premia and asset classes” so they can build resilient long-term portfolios. But he warns that investors need more education about different investments and their risks. Jumping into alternatives is “not for the faint-hearted,” says Bowman.

Then again, investing in anything today is not for the faint of heart, given the current rate of inflation and the Fed’s plans.

Write to Lauren Foster at


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