The Growing Role of Liquid Diversifiers

Liquid diversifiers can play a crucial role in portfolio construction against a backdrop of growing global market risk and uncertainty, according to WTW strategists.

The firm’s experts recommended investors put together a ‘team’ of liquid diversifier strategies to maximize diversification benefits in investment portfolios.

They said that the once-reliable negative correlation between bonds and equities can no longer be taken for granted. This has left a gap in the market that has been filled by liquid diversifiers, which offer a range of strategies that seek to provide returns that are uncorrelated with equities and bonds.

This tactic has a proven track record, with liquid diversifiers offering investors resilience during the turbulent market following the COVID-19 outbreak in 2020 and after the simultaneous equity and bond market selloffs in 2022.

WTW’s strategists emphasized that liquid diversifiers can go beyond providing stability in market downturns, as investors using uncorrelated liquid diversifying strategies, such as insurance-linked securities or alternative beta strategies, can quickly respond to changing market conditions.

Equity and credit long-short strategies can also add above-market returns, generating alpha for investors to help them meet their long-term goals.

For example, there is often a high dispersion in asset prices among active long-short strategies, which creates opportunities for long-short managers to profit from mispricing.

WTW’s strategists said:  “Constructing a well-rounded portfolio is like assembling a winning soccer team: it means selecting the right combination of individual talents and then managing them to meet the challenges of the day.

“Portfolio construction should aim to consider every eventuality, including remaining highly liquid to provide flexibility without sacrificing diversity — something we think liquid diversifiers are well equipped to do.”