Bear Market in Diversification Eases as Investors Seek Alternative Assets

The market landscape in 2025 is undergoing a significant transformation, with investors increasingly turning to alternative assets as a hedge against the volatility and uncertainty that has characterized the past few years. This shift marks a return to diversification strategies, which have long been advocated by financial experts but have been overshadowed by the relentless rise of US equities since the financial crisis.



The resurgence of diversification strategies is driven by several key factors. Firstly, the ongoing tariff war has created an environment of market disruption, leading investors to seek stability in assets like gold, corporate debt, and Treasury indexes. As reported by Bloomberg, a Treasury index has climbed almost 3% this year, while gold and corporate debt are among the top-performing assets. This shift reflects a change in investment trends as investors seek to mitigate risk in an uncertain market environment.

Secondly, the performance of alternative assets has been impressive. Gold has reached a record, extending a stretch of advances that has lasted in all but one week this year. The iShares 20+ Year Treasury Bond ETF (TLT) has outperformed its equity counterpart for seven out of the past eight weeks, something that hasn’t happened since 2014. This performance has made these assets attractive to investors looking for stability and returns in a volatile market.

Historically, diversification strategies have been overshadowed by the steady rise in US shares since the financial crisis. However, the current market correction in the S&P 500, which ended another week of uncertainty with a 0.5% increase, has brought diversification strategies back into focus. As Meb Faber, founder of Cambria Funds, commented, "It feels a long time coming." His global asset-allocation ETF (GAA) has risen 3% this year, potentially marking its best performance relative to the S&P 500 since its inception.

The benefits of diversification have been evident during this period of turmoil. For example, an exchange-traded fund (ETF) that diversifies bets across asset classes, including commodities and bonds, has surged more than 5% to start the year, roughly 9 percentage points better than the S&P 500. This highlights the effectiveness of diversification strategies in mitigating risk and enhancing returns.

Investors are being encouraged to explore a broad range of strategies, including both bullish and bearish equity wagers. Pete Hecht, head of the North America portfolio solutions group at AQR Capital Management, advised, "I would say investors need to lean on diversification even more than normal." This advice reflects the current market sentiment and the need for investors to adopt a more balanced approach to investing.



In conclusion, the shift towards alternative assets and diversification strategies reflects an evolving investment landscape. As traditional equities continue to face uncertainty, investors are seeking more balanced portfolios to mitigate risk. This trend could potentially reshape Wall Street’s approach to investment, emphasizing the importance of diversification in an increasingly volatile market.