“If you’re looking at a 10% to 20% [alternatives] allocation, you’ll probably have to pull from both stocks and bonds,” Roe said, adding it makes sense to do that in the current environment where both equities and fixed income are, on the whole, at high valuations.
If you’re creating alternative allocations by taking that money from the fixed-income side, Chang said, you want to focus on taking money from investments with long-durations and which have the biggest interest rate exposure. If you’re designing an alternative portfolio that’s intended to reduce equity beta risk, then it should be sourced from equities.
“In our experience, most users gravitate toward a diversified alternative portfolio meant to be sourced roughly equal from both equities and fixed income,” Chang said.