5 Ways to Diversify a 60-40 Portfolio

Other Alternative Investment Tools

In addition to private equity, other alternative investment strategies may prove effective in today’s higher volatility environment, warranting attention from advisors and investors seeking to diversify their 60-40 allocations.

As with private equity, these strategies are becoming increasingly accessible to individual investors through registered funds and, in the case of structured products, separately managed accounts.

Private credit: Private credit — and in particular, senior-secured direct and asset-based lending — provides exposure to floating-rate securities, with stable total returns, attractive yields, and defensive attributes to help protect against defaults.

Additionally, private debt can provide diversification benefits, offering further value in client portfolios.

Hedge fund strategies: Multi-strategy, long-short credit and relative-value arbitrage strategies can benefit from the non-correlated, return-generating opportunities that arise in an environment of greater uncertainty and rising volatility.

Real estate: Investments in private real estate, timber, farmland and global commodities can offer compelling yields, diversification, and exposure to potential “long volatility” strategies, complementing the traditional long-only portfolio construct.

Structured products: Yield enhancement instruments allow investors to benefit from rangebound markets by combining conditional downside protection to a pre-set barrier level, along with partial upside participation via a fixed coupon that typically offers a higher yield than the standard interest rate market.

Advisors concerned that the shift in stock-bond correlations may reflect a new market reality — particularly in the context of a volatile macroeconomic environment and heightened geopolitical risks — are increasingly looking to alternatives to augment portfolio diversification and growth.

Adoption of these strategies is likely to grow along with the number of fund structures tailored to the needs of individual investors, with implications for the classic 60-40 portfolio construct.

Robert Worthington is a Managing Director and Head of Independent Wealth Solutions at iCapital. Prior to joining the firm, he held senior positions at Brookfield Asset Management, Hatteras Funds, JPMorgan Asset Management and Undiscovered Managers. He obtained a BA from the University of Wisconsin-Madison, an MBA from the University of Pittsburgh. He holds FINRA Series 7, 24, and 63 licenses.