Part 1 of the “Modern asset allocation” Mini‑Series

The 60/40 portfolio has long served as a widely used cornerstone of multi‑asset allocation. Its appeal has traditionally rested on the expectation that equities can support long-term growth while high-quality bonds may provide income and diversification benefits. This framework is still valid – but its predictability has diminished.

Macro volatility, supply‑side inflation shocks, and shifting policy regimes have at times reduced the diversifications benefits historically observed between stocks and bonds. Today, the 60/40 is not dead, but it could benefit from reinforcement.

Many wealth managers are exploring whether traditional risk premia alone are sufficient to support portfolio resilience in a more complex investment landscape. Moreover, our Julius Baer Family Barometer 2025, in collaboration with PwC Switzerland, suggests that families increasingly integrate alternatives into their long-term investment strategies. Younger generations are using private investments to align wealth with values, legacy, and long-term impact across sectors and geographies.

As such, alternatives are becoming an increasingly essential component of modern strategic asset allocation. Our framework on cross-generational asset allocation suggests that by incorporating private market investments alongside traditional assets, model portfolios may demonstrate improved risk-adjusted outcomes. 

1. Adding alternatives can be more than just a risk-return trade off

The case for alternatives is often discussed in terms of better Sharpe ratios or incremental alpha. In reality, alternatives can introduce new economic exposures and distinct sources of return that are less readily available in public markets.

This diversification can extend beyond historical return patterns to differences in the underlying drivers of return:

• Many hedge fund strategies seek to generate returns from dispersion, arbitrage, and event-driven opportunities, which may be less dependent on overall market direction.
• Funds generate returns from dispersion, arbitrage, and event‑driven catalysts – return engines that don’t rely on market direction
• Private equity may provide exposure to value creation driven by factors such as earnings growth, operational improvements, and strategic initiatives.
• Private debt can play a stabilising role within some private markets portfolios.
• Private real assets can provide exposure to tangible, asset-backed investments such as real estate and infrastructure.

Together, alternatives may influence how portfolios respond to different market regimes. This structural diversification can be increasingly valuable when traditional assets move in tandem.

2. How Julius Baer integrates alternatives into the strategic asset allocation

Within our cross-generation asset allocation (CGAA) framework, alternatives are considered an important strategic allocation alongside traditional asset classes. 

Hedge funds: Consistent low correlation

We focus on strategies with persistently low equity beta (typically <0.3) and robust risk management. Larger allocations are directed toward multi‑strategy or multi‑portfolio‑manager platforms, where diversification is built into the architecture of the investment process. These platforms seek to generate diversified return streams across a range of market activities.

Private equity: Long‑term value creation

Private equity continues to be viewed by many investors as an important source of long-term return potential. With more value creation happening before IPOs, exposure to operational improvement, strategic repositioning, and sector specialisation may help investors access areas of growth that are less represented in public markets.

Private debt: Stability and income

Our preferred allocation is income‑oriented direct lending, predominantly senior secured, floating‑rate structures. These strategies may provide predictable cash flows, can reduce duration and interest-rate sensitivity relative to traditional fixed income, and can play a stabilising role. 

Private real assets: Inflation resilience

Allocations to infrastructure and real estate can be structured with the objective of enhancing portfolio resilience and complement growth-oriented private-equity exposure. We prefer a strategy mix balanced across core, core+ and selective value-add exposures to align with client risk tolerance.

3. Instrument and manager selection remain critical

Strategic asset allocation is widely regarded as the cornerstone of long-term portfolio success, with alternatives potentially contributing to diversification and return objectives. Investors should approach allocation with disciplined pacing, mindful of liquidity constraints and lock-in periods. While the medium-term outlook for alternatives remains broadly favourable, success can depend on selecting top-tier managers, maintaining diversification across strategies, and aligning commitments with long-term objectives.

Looking ahead

As this mini‑series continues, we will explore how to build a modern multi‑asset portfolio that integrates public and private markets systematically. One observation emerging from this discussion is that alternatives are becoming increasingly difficult to ignore in strategic portfolio construction. For many investors, alternatives may represent a valuable component of a diversified portfolio designed to navigate a range of future markets conditions.