Don’t Give Up on Diversifiers After a Difficult Stretch

While some alternative strategies have performed well, those designed to reduce volatility have struggled to keep pace with equities in recent years, leading investors to question their role in portfolios. Certain approaches, particularly systematic strategies, have been challenged by rapid reversals and shifting correlations, while others have simply lagged in a steadily rising market. So, investor interest has waned, even as the case for diversification is strengthening.

That reaction is understandable, but it may be misplaced. Alternatives are not designed to outperform in every environment. They often lag during strong, stable equity markets. Their value lies in how they behave when conditions shift, whether through rising volatility, changing correlations, or more uneven return patterns across markets. Judging them on recent performance risks overlooking that role. Event-driven strategies, for example, can go through uneven periods when deal activity slows or regulatory scrutiny rises. Those environments compress spreads and reduce the opportunity set, leading to muted returns even when the process remains intact.

Merger Fund delivered solid results over the three years through May 2026, returning 6.1% annualized, benefiting from an improving deal environment and more consistent spread capture. The strategy also gained 8.1% in 2025, its strongest result in more than a decade, amid a more supportive regulatory backdrop. The strategy seeks consistent, low-volatility returns by investing in merger-arbitrage opportunities with limited reliance on broader market direction. Over the past 15 years, the fund has produced a 3.1% annualized return with 2.8% volatility, strong downside protection, and only one negative calendar year. Even so, the approach comes with trade-offs. Performance depends heavily on deal flow and execution. A slowdown in merger activity or an increase in deal breaks can weigh on results as target companies reprice toward stand-alone values. Still, the strategy’s long-tenured managers see the current environment as one with improving opportunities.

BlackRock Systematic Multi-Strategy highlights both the appeal and trade-offs of defensive diversifiers. The strategy invests across equities, fixed income, and currencies using a mix of trend, relative value, and macro signals, seeking steadier returns with less downside than traditional risk assets. The fund’s 5% gain in 2025 landed in the multistrategy Morningstar Category’s bottom quartile, but its longer-term profile is stronger. Over the 10 years through May 2026, it returned 4.3% annualized with just 4.2% volatility and a maximum drawdown of 5.8%, one of the category’s strongest downside records.

That risk control is the point. Systematic multistrategy funds are unlikely to keep up in strong equity markets, and their models can struggle when trends reverse quickly. But for investors seeking diversifiers that have historically held up better in difficult environments, these funds’ muted recent performance may say more about the market backdrop than about the usefulness of the approach.

These strategies take different approaches, but that’s the point. Event-driven funds rely on idiosyncratic corporate outcomes, while systematic multistrategy funds seek to capture opportunities across asset classes and signals. Their return drivers are distinct, and these strategies are best used as complements rather than core holdings. Modest allocations can provide diversification benefits without materially altering overall returns. Their primary role is not to maximize returns but to improve portfolio resilience.

That requires patience. These strategies can post modest returns in strong markets, and their benefits often only become clear over a full market cycle. While the examples here highlight two approaches, the broader takeaway applies across many alternative strategies. The risk is not that they lag in bull markets; it’s abandoning them after they disappoint, just as their role may be becoming more important.