Why Investors Are Revisiting Diversification

Alexander Lubnevsky

Apr 3, 2025

The prolonged growth of the stock market in recent years has led American households to hold a record share of their savings in stocks, and investors have become accustomed to rapid market recoveries even after significant declines. The first quarter of 2025 has significantly changed sentiment: markets are falling, and the usual "buy and hold" strategies are no longer working. Therefore, investors are once again turning to diversification.

By early April, the S&P 500 is at the level of September 2024, having lost 5.5% since January 1. The "Magnificent Seven" index, which was a driver of confident market growth in 2023–2024, has fallen by 16% over the past three months.

In contrast, traditional defensive assets have shown decent dynamics since the beginning of the year. The ETF on long-term US Treasury bonds with a portfolio duration of 16 years, known by the ticker TLT, has gained almost 3.5% since the beginning of the year. Gold has risen by 21% over the same period.

In addition to defensive assets, which investors typically flock to at the start of a risk-off period, diversified strategies are performing well in 2025, reports Bloomberg:

— The 60/40 strategy, according to the agency's calculations, is outperforming the S&P 500. — RPAR (Risk Parity ETF) — a fund that allocates assets between US company stocks, as well as other international and emerging markets, treasuries, and inflation-protected bonds, has grown by 5% since the beginning of the year, outperforming the S&P 500 by approximately 11 percentage points. — The GAA (Global Asset Allocation) fund, investing 45% in stocks, 45% in bonds, and 10% in alternative strategies, is also confidently outperforming the S&P 500. Since the global financial crisis, the global portfolio has outperformed US stocks only twice by the end of the year — in 2011 and 2022.

More complex strategies are also working, such as factor-based ones that select stocks based on characteristics like value or momentum. The Bloomberg GSAM US Equity multifactor index has grown by 2.5% since the beginning of the year. And those using options for income or protection are also winning this year compared to the "buy and hold" S&P 500 strategy, notes Bloomberg.

Given the current valuations of US stocks, the continuing concentration of indices in the tech sector, and worsening growth forecasts, it makes sense to consider a wide range of strategies. For example, investing in funds that make both bullish and bearish bets, noted Pete Hecht, head of the North American investment solutions division at AQR Capital Management. "I would say that investors need to rely on diversification even more than usual," Hecht noted.

At the end of last year, GEIST invested in a fund managed by this company, and recently we talked about the investment approach of its founder Cliff Asness.

AQR is among a growing number of Wall Street firms promoting a leveraged investment approach called "portable alpha", to help investors diversify portfolios across assets. The strategy uses derivatives to track the returns of indices intended only for long positions, then invests excess cash in hedge fund-backed trades, including trend-following or market-neutral strategies.

Why this matters

The ARGO fund, which has a diversified portfolio of conservative instruments, performs better than market instruments during their decline and is comparable during their growth. This year, the fund gained 2.2% by the end of March.