Stocks and bonds are getting clobbered in 2022. Here’s where investors can turn for protection

Published Sun, May 8 20227:37 AM EDT

This year's bout of market volatility has left investors with few safe havens — and that's making alternative investments and other strategies even more attractive. Stocks have cratered in 2022, with the S & P 500 losing more than 13%. The Federal Reserve's move to hike interest rates again last week hasn't helped sentiment, as the Dow Jones Industrial Average shed more than 1,000 points on Thursday . The tumult hasn't spared the fixed income space, either. The 10-year Treasury bond yield has spiked past 3.1%, and prices – which move inversely to yields – have slid. Even legendary investor Paul Tudor Jones said on CNBC last week , "You can't think of a worse environment than where we are right now for financial assets." That means some investors are turning toward other asset classes to help soften the blow. "A market like today with rising rates, we haven't seen this environment since the 1970s, and it's negative for bonds but also a negative for stocks," said Shana Sissel, director of investments at Cope Corrales. "Alternatives provide good diversification and they're a hedge." To better contend with market shocks, some investors are hunting for different asset classes that might zig while stocks and bonds zag. Seeking alternatives Commodities are shining at a time when inflation has been reaching levels not seen since 1981, according to Amy Arnott, portfolio strategist at Morningstar. Consider the Pimco CommoditiesPLUS Strategy I2 (PCLPX) is up nearly 25% in 2022 Liquid alternatives – mutual funds and ETFs that offer protection and diversification through sophisticated strategies – are also in the spotlight. "I'm a strong believer in using alternatives as risk mitigation tools," said Sissel. "We're 20% in liquid alternative offerings here." For a hypothetical client with a $1 million portfolio, $200,000 would go toward alternatives, while the remaining $800,000 would be allocated 60/40 toward equities and bonds, respectively, she said. The funds Sissel has been recommending include the AGFiQ US Market Neutral Anti-Beta Fund (BTAL) , the BrandywineGLOBAL - Alternative Credit Fund Class (LMAOX) , the AQR Macro Opportunities Fund (QGMNX) , and the First Trust Global Tactical Commodity Strategy Fund (FTGC) . There's a catch, of course. For instance, on their own, so-called liquid alts can be volatile. For instance, BTAL is up 13% in 2022, but it ended last year down 6.8%. It dropped more than 13% in 2020. Cost and complexity are also hurdles for investors. Expense ratios for liquid alts can run upward of 1%. Liquid alt strategies use derivatives and margin, which contribute to the cost of the funds, said Sissel. Managing inflation and searching for growth Real estate and bank loans are two other areas that may offer investors returns and portfolio diversification, but those asset classes come with their own set of risks, said Morningstar's Arnott. "At certain times in the past, real estate has done well as an inflation hedge," she said. "It has sort of a mixed record in that it's done well in some previous periods of high inflation, but not all." See below for a table of some of Morningstar's top-rated fund ideas for diversification. Investors seeking a little more return on cash – but without jumping into more exotic asset classes – also have other alternatives. For instance, Series I savings bonds , which you can buy through TreasuryDirect.gov , are touting an initial interest rate of 9.62%. They're also inflation protected. Further, they're exempt from state and local income taxes, but federal income levies still apply. Just be sure this isn't money you need to access right away. You can cash I bonds after one year, but if you redeem them before five years, you lose the last three months of interest. "This should be cash you're putting away for longer," said Brenna McLoughlin, certified financial planner and senior advisor at Wealthstream Advisors. "The idea of a rate of return like that on something that's backed by the full faith of the government is very attractive to people right now."

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This year's bout of market volatility has left investors with few safe havens — and that's making alternative investments and other strategies even more attractive.