Think of your investment portfolio as consisting of 100 pieces.
The 60/40 portfolio strategy proposes that you invest 60 pieces into equity investments and 40 into fixed income investments. However, these traditional allocations suffered in 2022 as both stocks and bonds experienced correlated losses. In Alternative Investments 2023, alternatives are proposed as potential solutions to eight cyclical and secular themes:
1) Volatility and Dislocations
2) Higher for Longer
3) Recession Risks
4) Diverging Growth
5) Geopolitical Dynamics
6) The Evolving Equity Market
7) Investing for Impact
8) Accelerating Innovation
Alternatives offer the potential for uncorrelated returns and also trade across a range of liquidity profiles. So, how might investors adapt their traditional portfolios? The 60% and 40% are reduced to direct 23.5% of the allocation into alternatives. The portfolio includes private equity, long/short hedge funds, absolute return funds and real assets.
Of course, a model portfolio is not a one-size-fits-all solution for high-net-worth investors. Nonetheless, adding some alternatives – across liquidity profiles – represents our best investment thinking as they both help buffer against volatility and provide the potential for enhanced returns.
We believe markets will be driven by four factors, which individually or collectively determine the optimal use of alternatives for our eight key cyclical and secular investment themes.
These four factors are:
1) Policy: Rising rates, tax policy and fiscal investments will expose headwinds and also provide tailwinds.
2) Valuation: More relevant given recent drawdowns in some assets.
3) Market Structure: Dislocations, volatility and changes to long-term correlations provide opportunities.
4) Geopolitics: Driven by international conflict, localization and competitive advantage.
Alternative Investments 2023 explores how alternatives can help you better meet your long-term goals. See how these indispensable diversifiers are expected to benefit from eight critical themes playing out today.
This material is provided for educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice and may not be used as such. Effort has been made to assure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. We recommend all individuals consult with their lawyer or tax professional, or their investment or financial advisor for professional assurance that this material, and the interpretation of it, is accurate and appropriate for their unique situation. BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation. Trademarks and logos belong to their respective owners.
The information in this paper is current as of May 2023. It is based on sources believed to be reliable, but its accuracy is not guaranteed.
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