Skip to main content
PGIM LogoPGIM Logo
    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Vantage Point Series
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
    • Investing in Alternatives
    • Risk Management
    • ESG Investing
    • Opportunities in EM
  • Alternatives

    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)

    Equity & Fixed Income

    • PGIM Fixed Income
    • Jennison Associates

    Solutions

    • PGIM DC Solutions
    • PGIM Multi-Asset Solutions
    • PGIM Quantitative Solutions

    Intermediary Distribution

    • PGIM Investments
    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
    • Global Locations
    • Contact Us
    • Overview
    • Leadership
    • History
    • Our Businesses
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
    • Careers at PGIM
    • Job Opportunities
    • All News
    • Press Releases
    • In the News
    • Facts & Figures
    • Media Contacts
abstract
Alternatives

Liquid Alts and a Deeper Approach to DiversificationLiquidAltsandaDeeperApproachtoDiversification

Apr 18, 2024

Share
  • Mail
  • LinkedIn
  • Twitter
  • Copy URL
  • Print

Share

It is hardly a secret today that institutional investors are allocating a growing share of their portfolio to private markets. US state and local pensions alone more than tripled their allocation to private markets and other alternative assets between 2001 and 2022, reaching 27.3%.1 Demand for private assets continues to expand, with investors broadly anticipating additional growth moving forward.2 In large part, the spark for this trend can be attributed to the success of large university endowments, whose sizable allocations toward private markets set the stage for growth. However, asset allocators seeking to replicate the endowment model must also consider the broader, unintended implications of this approach—namely, elevating liquidity risks in the portfolio. This underscores the role that liquid alternatives play in a diversified portfolio.

The rise of the endowment model, bringing with it an increasing share of illiquid assets in portfolios, necessitates that investors put greater emphasis on ex-ante risk management. To be clear, this has happened for good reasons. Investors have increasingly sought greater choice and, in seeking to build portfolios with a diverse mix of asset classes and investment strategies, turned to private markets. These assets are an important component of a diversified portfolio and became especially attractive during a period of ultra-low interest rates.

But with this shift to illiquid markets comes the potential for hidden concentration risks to develop in a portfolio. Thus, investors should be looking at risk through a wider lens. Rather than focusing solely on volatility, investors need to think about risk in multiple dimensions, including their exposure to liquidity and rebalancing challenges that may arise in an uncertain global environment. As investors observed in 2022, a concurrent decline in equity and fixed income asset prices left some portfolios with an overcommitted book in illiquid assets. The need to draw down on liquid investments for the purpose of funding distributions or other obligations widened the imbalance between liquid and illiquid allocations, creating additional challenges for CIOs.

Institutional investors should also note that not all alternatives are made equal when it comes to their liquidity profile. In private markets, some assets might have an investment horizon of three to five years. Others, such as farmland and timberland, may extend well beyond that timeframe.

Constructing a diversified portfolio that is genuinely diversified in its asset classes, strategies and liquidity profile calls for consideration of liquid alts like systematic macro strategies and managed futures. Liquid alts could offer substantial diversifying returns in a world where traditional asset classes come under stress. This could also be true in a world where few asset classes deliver on their expected returns, leading investors to seek diversification through sources of return that can cushion the blow by reducing downside risk and the overall volatility of a portfolio. To achieve this, investment strategies must be agile and disciplined, two things that have contributed to a re-emergence in demand for process-driven and quantitative investing. Facing an uncertain global outlook, a growing number of investors have viewed quantitative techniques as a means of generating returns in a volatile, ever-changing world.

Managed Futures Tend to Outperform a 60/40 Portfolio During NBER-Defined Recessions

Source: Bloomberg and PGIM Wadhwani. Chart displays recessions between 1972 and 2020. Provided for illustrative purposes only. Data as of March 2024.

Given their diversification characteristics, liquid alts have generally benefited investors through times when economic outcomes are unclear. Trend following and macro strategies have historically done well against a backdrop of recessions or high inflation, when compared with the 60/40 portfolio. For example, in 2022, a 60/40 portfolio was down more than 15%, while a trend following portfolio was up more than 15%.3 Liquid alts are adaptable as well. During rosier economic times, macro strategies are still likely to generate positive returns, making them conceivably a sound investment regardless of market conditions.

Rather than backing the investment styles, asset classes and investment vehicles that have performed well over the last decade, investors need to be cognizant that diversification comes in many different forms. While the endowment model has served them well, portfolios with a growing share of illiquid assets may be left more vulnerable to a situation where financial stress rises and liquidity once again earns a premia. This is why we believe it’s crucial to take a more holistic approach to asset allocation by seeking deeper diversification and uncovering hidden opportunities that can deliver in a changing world.

Learn More
Unlocking Alts: Opportunities in a New Investment Regime

As market conditions unfold, where can agile investors unlock opportunities across the spectrum of public and private alternatives?

Learn More

Learn more
PGIM Wadhwani

A London-based quantitative multi-asset macro specialist, backed by one of the world’s largest asset managers.

Learn more

You may also like

The Ongoing Evolution of Direct Lending
Alternatives

The Ongoing Evolution of Direct Lending

Apr 18, 2024

As demand for non-bank capital increases and yields remain attractive on a historical basis, direct lending continues to grow as an asset class.

Solving for Housing Supply Shortages Through Value-Add Investing
Alternatives

Solving for Housing Supply Shortages Through Value-Add Investing

Apr 18, 2024

Rental housing in the United States, which accounts for over one-third of all housing, is less affordable now than it has been for at least 40 years.

Opportunistic Credit Strategies for a Higher-Rate Environment
Alternatives

Opportunistic Credit Strategies for a Higher-Rate Environment

Apr 18, 2024

Companies are increasingly going outside traditional channels and relying far more on alternative solutions to meet capital needs.

  1. Public Plans Data, accessed March 2024. 
  2. PGIM Megatrends report, “The New Dynamics of Private Markets: Investment Risks and Opportunities”
  3. PGIM Wadhwani, “Market Uncertainty Calls for Doubling Down on Diversification”
  • Insights

    • Megatrends
    • Annual Best Ideas
    • OutFront Series
    • Quarterly Market Outlooks
    • Market Events
    • Thought Leadership
    • Events & Webinars
    • Video Library
    • Podcasts
  • Investment Themes

    • ESG Investing
    • Investing in Alternatives
    • Investing in Emerging Markets
    • Risk Management
  • Our Businesses

    • PGIM DC Solutions
    • PGIM Fixed Income
    • PGIM Investments
    • PGIM Multi-Asset Solutions
    • PGIM Private Alternatives
    • PGIM Private Capital
    • PGIM Real Estate
    • Montana Capital Partners (PE)
    • PGIM Quantitative Solutions
    • Jennison Associates
  • Clients

    • Clients We Serve
    • Defined Contribution
    • Financial Advisors
    • Institutional Relationships
  • About

    • Overview
    • Leadership
    • History
    • Diversity, Equity & Inclusion
    • Global Locations
    • Contact Us
    • Subscribe
    • Request for Information
  • Careers

    • Careers at PGIM
    • Job Opportunities
  • Newsroom

    • All News
    • Press Releases
    • In The News
    • Facts & Figures
    • Media Contacts
PGIM Logo
  • Terms & Conditions
  • Privacy Center
  • Accessibility Help
  • UK Regulatory Disclosures
  • Netherlands Regulatory Disclosures
  • Canadian Regulatory Disclosures
  • Ireland Gender Pay Gap Report
  • Cookie Preference Center

For Professional Investors only.* All investments involve risk, including the possible loss of capital.

This material is for informational and educational purposes only and should not be construed as investment advice or an offer or solicitation in respect of any products or services to any persons who are prohibited from receiving such information under the laws applicable to their place of citizenship, domicile or residence. PGIM is the principal asset management business of Prudential Financial, Inc. and a trading name of PGIM, Inc. and its global subsidiaries. PGIM, Inc. is a registered investment adviser with the U.S. Securities and Exchange Commission (“SEC”). Registration with the SEC does not imply a certain level of skill or training.

The information on this website is not intended as investment advice and is not a recommendation about managing or investing your retirement savings. In making the information available on this website, PGIM, Inc. and its affiliates are not acting as your fiduciary.    

In the United Kingdom, this website may be issued by PGIM Private Alternatives (UK) Limited or PGIM Private Capital Limited.  In the European Economic Area (“EEA”), this website may be issued by PGIM Private Capital (Ireland) Limited or PGIM Luxembourg S.A. or PGIM Real Estate Germany AG.

PGIM, Inc. has its headquarters at 655 Broad Street, Newark, NJ 07102. PGIM Private Capital (Ireland) Limited has its registered office at IDA Business Park, Letterkenny, Co. Donegal, F92 FP83, Ireland. PGIM Private Capital (Ireland) Limited is authorised and regulated by the Central Bank of Ireland and registered in Ireland under company number 635793 operating on the basis of a European passport. PGIM Limited and PGIM Private Alternatives (UK) Limited have their registered offices at Grand Buildings, 1-3 Strand, Trafalgar Square, London WC2N 5HR. PGIM Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom (Firm Reference Number: 193418). PGIM Private Alternatives (UK) Limited is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 181389). PGIM Private Capital Limited has its registered address at 1 London Bridge, London SE1 9BG and is authorised and regulated by the FCA of the United Kingdom (Firm Reference Number: 172071). PGIM Luxembourg S.A., Netherlands Branch is registered with the Netherlands Chamber of Commerce under number 85998877 and has its local offices at Gustav Mahlerlaan 1212, 1088LA Amsterdam, The Netherlands. PGIM Luxembourg S.A. has its registered address at 2 Boulevard de la Foire, L-1528 Luxembourg and is authorised and regulated by the Commission de Surveillance du Secteur Financier (“CSSF”) in Luxembourg (registration number A00001218). PGIM Real Estate Germany AG has its registered address at Wittelsbacher Platz 1, 80333 Munchen, Germany and is authorised and regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (“BaFin”) in Germany (registration number 10138142).

In Japan, information is provided by PGIM Japan Co., Ltd. (“PGIM Japan”) and/or PGIM Real Estate (Japan) Ltd. (“PGIMREJ”).  PGIM Japan, a registered Financial Instruments Business Operator with the Financial Services Agency of Japan offers various investment management services in Japan.  PGIMREJ is a Japanese real estate asset manager that is registered with the Kanto Local Finance Bureau of Japan.

In Hong Kong, information is provided by PGIM (Hong Kong) Limited, a regulated entity with the Securities & Futures Commission in Hong Kong to professional investors as defined in Section 1 of Part 1 of Schedule 1 of the Securities and Futures Ordinance (Cap. 571). In Singapore, information is issued by PGIM (Singapore) Pte. Ltd. (“PGIM Singapore”), a regulated entity with the Monetary Authority of Singapore under a Capital Markets Services License to conduct fund management and an exempt financial adviser. This material is issued by PGIM Singapore for the general information of “institutional investors” pursuant to Section 304 of the Securities and Futures Act 2001 of Singapore (the “SFA”) and “accredited investors” and other relevant persons in accordance with the conditions specified in Section 305 of the SFA. In South Korea, information is issued by PGIM, Inc., which is licensed to provide discretionary investment management services directly to South Korean qualified institutional investors on a cross-border basis.   

Prudential Financial, Inc. (“PFI”) of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom. 

*PGIM.com/Podcasts and its content is intended for informational or educational purposes only and is not directed exclusively to Professional Investors. 

PGIM Logo
PGIM Logo

You are viewing this page in preview mode.

Edit Page