Strengthening the 60/40 with Alternatives

Thursday, July 6, 2023

LPL Research recently posted a blog on the strong recovery of the 60/40 portfolio, the Strategic and Tactical’s (STAAC) continued conviction in the 60/40 from both tactical and strategic perspectives, and potential usage of alternative investments as an effective hedge and portfolio diversifier for the 60/40. We would like to expand on the last point and examine how adding alternative investments could strengthen the 60/40 portfolio, especially in times like 2022, both from downside risk management and risk/return enhancement perspective.

Stocks and bonds have carried low to negative correlation most of last 25 years and have worked as portfolio diversifiers for each other. For that reason, the 60/40 portfolio has served investors as the foundation of a well-balanced and well-diversified portfolio that can benefit from each asset class’ strength and weather through different phases of economic and market cycle. That said, it’s worthwhile to note that was not the case in prior decades, and even during the last 25 years, there have been times when the correlation broke and both asset classes sold off at the same time. They have been triggered by different reasons – sometimes fear of economic and market health driven, like the 2008-2009 Great Financial Crisis or March 2020 Covid-19 outbreak when investors opted for cash above other financial instruments to safeguard their assets, some other times policy action driven, like the Fed’s rate hikes in 2022 where high inflation and rising interest rates put pressure on corporate profits and also drove bond prices down. Regardless of the reason, these time periods raised questions on what else could be added to the 60/40 portfolio to manage the potential downside and improve overall risk/return profile.

View enlarged chart

We believe alternative investment strategies can be a key answer for these questions. Alternative investments have been used for various purposes, namely portfolio diversification, risk/return enhancement, protection from economic and market sensitivity, downside risk management and as an income source. Each strategy carries unique strengths and risk, but alternative investment strategies as a whole have helped investors improve their portfolios’ risk/return profile.

View enlarged chart

More importantly, for the purpose of this blog, we would like to highlight a selective set of liquid alternative investment strategies, namely Global Macro and Managed Futures strategies, that have a proven track record of generating performance uncorrelated to both stocks and bonds, helping the 60/40 portfolio when it needed additional portfolio diversification and downside management the most.

Global Macro and Managed Futures strategies have unconstrained mandates in terms of asset classes, directionality, and trade structure. This allows them to trade across the asset classes and re-allocate capital to where they see the most opportunities in, to be not constrained by a rising market as they are agnostic in terms of which side of the market they are positioned for (long, short, or combination of both for each market), and can use options and other derivatives to help generate performance in times of rising volatility. They have been steady performers as standalone strategies, but more importantly, they have been effective portfolio diversifiers and downside protectors in the past, when the 60/40 portfolio needed them. Of course these strategies carry its own investment risks and investment decisions should be made after careful consideration of each investor’s risk/return tolerance and rest of his/her portfolio composition.

View enlarged chart




This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

An efficient frontier is a set of investment portfolios that are expected to provide the highest returns at a given level of risk. A portfolio is said to be efficient if there is no other portfolio that offers higher returns for a lower or equal amount of risk. Where portfolios are located on the efficient frontier depends on the investor’s degree of risk tolerance.

The efficient frontier is represented by plotting the expected returns of a portfolio and the standard deviation of returns. The y-axis is made up of the expected returns of the portfolio. The x-axis is labeled as the standard deviation of returns, which is a measure of risk.

A portfolio is then plotted onto the graph according to its expected returns and standard deviation of returns. The portfolio is compared to the efficient frontier. If a portfolio is plotted on the right side of the chart, it indicates that there is a higher level of risk for the given portfolio. If it is plotted low on the graph, the portfolio offers low returns.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Asset allocation does not ensure a profit or protect against a loss.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations |Not Bank/Credit Union Guaranteed | May Lose Value

Tracking # 1-05374574