Liquid alternatives are a useful addition in the low interest rate environment

Bond yields have been falling for decades. As a result, c20% of bonds outstanding today are negative yielding, which poses two major challenges for investors. First, negative-yielding bonds result in a guaranteed loss for "buy-and-hold" investors, which – consequently – does not compensate for the risk of rising yields, at the very least, which could result in significant short-term losses. Second, the traditional hedging effect of bonds in equity market corrections is limited. The synchronisation (correlation) between equities and bonds has increased and the limited scope for further falling yields in the event of a crisis limits the potential price gain for bonds. Therefore, especially in defensive and – by implication – more bond-heavy strategies, it seems reasonable to consider alternative investments to at least partially replicate or complement the traditional characteristics of bonds. In addition to commodities and illiquid investments, liquid alternatives are regularly mentioned for this purpose. What does this involve? Which strategies should be distinguished and what challenges do investors face when pursuing this path? We shed light on sensible approaches and report on our experiences.