Alternative risk premia: a diversifier for alternative paradigms

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Dr Daniele Lamponi and Dr Lars Jaeger of GAM Systematic ARP remind us that negative correlation between equities and bonds is a relatively new phenomenon. They contend that in periods of higher inflation stocks and bonds might both suffer and benefit in tandem, and therefore diversifying into alternative assets could lead to more resilient and robust portfolios.

22 November 2022

  • While negative equity/bond correlation has for many years been a cornerstone of asset allocation decisions among institutional investors, according to both theoretical and empirical considerations there is no guarantee that stocks and bonds are or will be positively or negatively correlated – and were not prior to 30 years ago.
  • With high inflation, stocks and bonds might both suffer and benefit together, as increasing inflation expectations hurt bonds and equities suffer from pricing uncertainties and cost pressures. The last time we saw this was in the early 1980s. In the current environment, equities are losing value and bonds, once considered a hedge against falling equity markets, no longer look so reliable.
  • In these alternative paradigm scenarios, diversifying into alternative risks and assets, such as the ones offered by Alternative Risk Premia (ARP) programmes, can contribute to making a global portfolio more resilient and robust. ARP programmes are structured to cope with both low and high inflation periods, as shown by strong year-to-date performances across the ARP sector.

The equity/bond correlation is a cornerstone of asset allocation decisions among institutional investors. This developed from the early 1990s, and negative correlation between stocks and bonds has persisted since. This is also the only lived experience of many professional investors today, including us. However past performance is not a guide to future performance, and our role as investment professionals is also to assess risks and opportunities arising from changing market conditions. It is, therefore, normal that we challenge this assumption, even if it is anchored in our professional experience, and that we raise questions about how long this negative correlation will persist.

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Important legal information
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. There is no guarantee that forecasts will be achieved. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice. Assets and allocations are subject to change. Past performance is no indicator for the current or future development.

Dr Daniele Lamponi

Investment Manager, GAM Systematic Alternative Risk Premia
My Insights

Dr Lars Jaeger

Head of Alternative Risk Premia
My Insights

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