Uncertainty and the correlation conundrum

Beginning with the global financial crisis and ramped up during COVID-19, easy monetary policy coincided with the longest equity bull run in history, aided by the tailwind of low inflation. Bonds played their traditional role of safe haven in dampening volatility, but also provided strong returns.

Since 2022, however, not only have we seen a reversal in the bond/equity relationship, but bonds have also become more volatile relative to their history than equities, as shown in Figure 1. This has meant that strategies that rely heavily on combining these assets have found no safe haven.

Correlations have gone from being generally negative from the early 2000s to becoming neutral or even positive since inflation started rising in 2022. The correlation of asset returns is an important consideration for constructing diversified portfolios, hedging strategies and managing risk, and recent trends have led many commentators to speculate as to whether the era of the 60/40 portfolio has ended.

Figure 2 shows the relationship between inflation and equities/bonds correlation from the 1970s to the 2020s. For simplicity, we focus on the US, specifically correlation between the S&P 500 and ten-year Treasuries. However, this analysis can also be applied to other regions.

We see a clear relationship between correlation and inflation, with inflation typically far higher pre-2000 – and from 2022 onwards – than in the 2000s and 2010s. While most of the pre-2000 period saw positive correlation, 2000-2020 is characterised by negative correlation, which balanced portfolios have become accustomed to.

Rising inflation has a direct negative impact on nominal bonds and potentially equities as both equity and bond prices can be thought of as being determined by a series of discounted future cashflows. Rising inflation against a backdrop of weak economic growth is a particular pain point for investors.

As such, building portfolios that are risk diversified, flexible and able to preserve capital through varying market conditions is more crucial than ever. Increasingly, the answer may not lie in the traditional split of equities and bonds, but a combination of different, resilient strategies – some of which may be less conventional in nature.

The long bull run in equities and bonds caused most non-directional alternative strategies to lag in performance, leading investors to question their viability. However, the current market landscape requires a more considered appraisal of the role of alternatives.

Persistent inflation and policy uncertainty – and the subsequent rise in volatility – come with greater dispersion and opportunities to generate alpha. Accessing return drivers outside of traditional long equity and credit markets can enhance returns as well as provide diversification.

To demonstrate this, we examine the impact of including an allocation to AIMS TR of up to ten per cent in a diversified portfolio of developed and emerging market equities and bonds over multiple time horizons (Figure 3). Over a three-year period, its inclusion provides an uplift of between about 70 and 125 basis points, depending on the level of volatility targeted, which provides an appreciable benefit when considering the impact on compounded returns. This benefit – of around 60-90 basis points annualised – can also be seen over a longer five-year horizon.

Global macro multi-strategy solutions such as AIMS TR can provide greater risk factor diversification and access to a larger investment universe with more flexibility than simple 60/40 portfolios. Additionally, their broader macroeconomic view drives both idiosyncratic idea generation and portfolio construction. This differs from a traditional strategic asset allocation approach, meaning investors benefit from an additional level of diversification. 

Investors can’t always be right. Maximising the probability of achieving excess returns through good times and bad requires a well-diversified and risk-controlled mix of strategies, with robust management of tail risk. This needs expertise in risk factor analysis and quantitative techniques, alongside diligent oversight.

Embedding diversification and resilience is a key area of focus in our AIMS TR investment process. The strategy is generally composed of 15 to 25 diversified strategies that can take both long and short views across the risk drivers shown in Figure 4.

Figure 4: Risk drivers

Source: Aviva Investors, June 2025.

The strategies are categorised into the following three buckets:

• Market return strategies are dynamic allocations to market directional positions, which are expected to perform well in rising markets (e.g., long equities and credit).
• Opportunistic return strategies seek to capitalise on macro and idiosyncratic investment themes that are less dependent on the direction of the broader market (e.g., relative-value market-neutral trades).
• Risk-reducing strategies help stabilise performance through capital preservation positions (e.g., long duration, tail hedging, systematic strategies).

One measure to evaluate resilience is the ability to preserve capital through periods of market stress. Figure 5 illustrates the performance of AIMS TR during the ten worst rolling three-month periods of equity declines since the strategy’s inception; AIMS TR fared relatively well during the most difficult periods for equities.¹

Investors are facing an uncertain market, macro and policy environment, which is materially impacting the bond/equity correlation.

The diversification implications cannot be overstated. Resilient portfolios now require an ability to source other return drivers and implementation techniques capable of performing during periods of higher rates and equity and bond market volatility. 

AIMS TR, through its unconstrained approach, harnesses expertise from a broad array of investment professionals to access a wide range of ideas and expand potential sources of return and diversification.

We strongly believe its ability to access a much wider range of targeted implementation methods, as well as draw informed views on dynamic position management, is particularly valuable in this market environment. This combination offers resilience to an investor’s overall portfolio in a liquid and cost-effective manner.