Where to consider funding alternatives in a portfolio?
After selecting an alternative diversifier, the next step is considering how to source the new allocation. The BlackRock Target Allocation Model Portfolio Solutions team funds most of their alternative allocations from fixed income.
The exception to this funding decision is bitcoin: we believe its much higher volatility profile makes equities a more appropriate funding source. Note too that with such a high volatility profile, a little bitcoin can go a long way.
Conclusion: A new regime calls for new ways to build portfolio diversification
BlackRock anticipates that alternatives will continue to play a critical role in portfolio construction. Elevated correlations may continue, resulting in unreliability of traditional diversifiers in providing ballast. While diversification may not always protect against investing risk, we believe it is essential to building more resilient portfolios.
BlackRock can help you determine how best to build liquid alternatives into your portfolio construction process. You can find more information on the latest BlackRock Target Allocation model rebalance here , or explore the impact of alternative strategies on your own portfolio using our Advisor Center portfolio tools.
To learn more about what’s driving markets and how it shapes portfolio allocations, explore the Spring Investment Directions.
Oliver Hering, Sam McClellan, Erin Manifase, Emily Fredrix Goodman, and Emily Bond contributed to this article.
Glossary
Alternative assets – Investments that fall outside traditional public equities and fixed income. These include private markets (such as private equity and private credit), real estate, infrastructure, commodities, and digital assets. What defines them is not how they are managed, but the underlying assets themselves, which are often less liquid and not publicly traded.
Alternative strategies – How investments are managed, rather than what is owned. These strategies are commonly associated with hedge funds and quantitative investors and include approaches such as long/short equity, market neutral, event-driven, and global macro. While considered “alternative” because they differ from traditional long-only investing, alternative strategies often utilize conventional asset classes like publicly traded stocks, bonds, currencies, and derivatives.
Beta – Measures how sensitive an asset’s returns are to movements in a broader market or index. A beta of 1 means the asset moves in line with the market, above 1 indicates greater sensitivity, and below 1 indicates lower sensitivity.
Correlation – A statistical measure of how stock and bond returns move together over time, ranging from −1 (move perfectly opposite) to +1 (move perfectly together), with 0 indicating no relationship.
Diversifiers – Assets or strategies included in a portfolio that exhibit low or negative correlation to traditional core holdings such as equities and bonds, with the goal of reducing overall portfolio risk and volatility, and improving risk-adjusted returns. By behaving differently across market environments, particularly during periods of stress, diversifiers help offset losses in other parts of the portfolio and enhance overall resilience, even if their standalone returns may be lower or more variable.
Liquid alternatives (alts) – Investment strategies that employ hedge fund–like approaches, such as long/short, market neutral, or global macro, but are offered in liquid, publicly traded vehicles that provide regular pricing and investor access, typically through mutual funds or ETFs.
Liquid/liquidity – How easily an asset can be bought or sold in the market without significantly affecting its price. Highly liquid assets can be traded quickly with minimal price impact, while less liquid assets may require more time to transact and may involve larger price concessions.
Hedge fund style strategies in a 40 act mutual fund – Utilizing investment approaches typically associated with hedge funds, such as long and short positioning, derivatives, leverage, and market neutral or alternative premia strategies, within a U.S. mutual fund structure governed by the Investment Company Act of 1940. This allows investors to access more complex return strategies with the benefits of daily liquidity, transparency, and regulatory oversight.
Volatility – The degree of variation in an asset’s price over time, typically measured by how much and how frequently returns deviate from their average. Higher volatility means larger and more frequent price swings, indicating greater uncertainty or risk, while lower volatility reflects more stable and predictable price movements.
Risk Management – The process of identifying, measuring, and controlling potential sources of loss within a portfolio by balancing exposures across assets, factors, strategies, and more. It involves techniques such as diversification, position sizing, and hedging to manage volatility and drawdowns while aiming to achieve a desired return profile.