Volatility and correlations are rising. Here are three liquid, high-value proposition quant-investing ideas to fortify portfolios.

The volatility in equity markets since October 2018 reflected concern with respect to equity market valuations that had been building for some time. Earnings remain strong, but as this exceptionally long business cycle matures, the tension is palpable between these positive fundamentals and the potentially disruptive forces of trade conflict, geopolitics, the return of inflation and the withdrawal of ultra-loose monetary policy.

Nowadays, most individual and institutional investors diversify their assets in a portfolio of equities and bonds with a sleeve of alternative strategies. In the past, if you thought the business cycle was mature and equities looked expensive relative to the yields you could get from bonds, you could adjust your portfolio allocations from stocks to fixed income. However, after a post-crisis decade of below-trend growth and quantitative easing, bond yields today remain low in many developed markets outside the U.S., and even within the U.S. they appear low relative to where we are in the cycle.

Are we in the mature part of the cycle? That’s a semantic debate. What is clear is that we already see market phenomena that have been associated with a maturing cycle in the past, such as high asset valuations, rising rates, increasing volatility and tighter traditional-asset correlations. How can investors prepare for these conditions?

We highlight three liquid and cost-effective ideas for consideration:

  • Collateralized equity index put writing as a way to maintain equity exposure at lower volatility without adding significant interest rate risk
  • Long-short risk premia investing for its low correlation with equities and bonds
  • A risk-parity approach to investing to promote genuine diversification among traditional asset classes

We think these quantitative investment strategies can be very powerful at all times in a cycle—but they have a particularly interesting role to play in the currently emerging conditions.