Three Alternative Strategies to Consider When Volatility Resurfaces

Equity market declines often make diversification feel urgent. Positions that ostensibly offer different exposures can suddenly decline together if they’re positively correlated, leaving investors with greater sensitivity to the risks than initially anticipated. For portfolios built primarily around stocks and bonds, alternative strategies can introduce additional, decorrelated sources of return that help reduce dependence on favorable market conditions.

That flexibility can be especially valuable when the source of market stress changes. An inflation shock, a deteriorating growth outlook and a sudden shift in investor sentiment can each call for a different response. No matter the source, alternatives can expand the portfolio toolkit through decorrelated sources of return and frequently exhibit meaningful downside protection when markets sour. Here are a few of WisdomTree’s greatest ideas:

WTMF: A Trend-Following Diversifier

The Original Postroducts/alternative/wtmf" target="_blank" rel="noopener noreferrer">WisdomTree Managed Futures Strategy Fund (WTMF) seeks positive total returns in rising or falling markets with returns that are not directly correlated with broad equity or fixed income markets. Its actively managed, systematic approach uses futures across commodities, currencies, equities and interest rates, with the ability to take long and short positions as its signals change. The Fund may also allocate up to 10% of net assets to bitcoin futures or exchange-traded products that hold bitcoin.

For equity investors, WTMF’s appeal is the ability to respond to trends across several markets, as persistent moves in currencies, commodities or interest rates may create opportunities even when stocks struggle. The flexibility to adjust directional exposures gives WTMF several potential sources of return beyond equity appreciation.

But the return potential also extends into downside protection during the worst sessions for U.S. equities. Over the past 10 years, the S&P 500 has fallen by one standard deviation (about 1.13%) on 256 occasions. WTMF outperformed the index on 253 of those occurrences, a hit rate of 99%. More impressively, WTMF produced positive absolute returns when the S&P 500 fell by 1.13% or more on 91 occasions. That means that, 35% of the time, WTMF outperformed the worst declines for the S&P 500 by delivering positive performance, rather than exclusively less negative returns.

Figure 1: Excess Return: WTMF vs. S&P 500 When S&P 500 Falls More Than 1σ

WTPI: Cushioning Declines with Option Income

The WisdomTree Equity Premium Income Fund (WTPI) seeks to track the Volos U.S. Large Cap Target 2.5% PutWrite Index. Its strategy systematically sells put options tied to the S&P 500, with cash collateral invested in U.S. Treasury bills. This combines premium income with income earned on the collateral to buffer portfolios from equity market weakness.

The portfolio benefit comes from changing how investors participate in equity markets. Premiums received can help offset losses on the options during declines, potentially reducing downside participation relative to owning the market outright. Higher implied volatility generally increases the premiums available on newly written options, creating opportunities to collect more income as positions are renewed (and if actual market volatility is less than implied). We view it as a way to seek a smoother equity-related return stream during volatile markets, and a protective complement to an existing stock allocation.

Figure 2: Excess Return: WTPI vs. S&P 500 When S&P 500 Falls More Than 1σ

Like WTMF, WTPI also sports an impressive hit rate on the S&P 500’s worst days. Over the 243 days since WTPI inception in February 2016 where the S&P 500 declined by one standard deviation or more, WTPI outperformed on 228 of them, a 94% hit rate, underscoring its effectiveness as an equity-related (but decorrelated) diversifier.

GCC and Diversification through Commodity Markets

The WisdomTree Enhanced Commodity Strategy Fund (GCC) provides exposure to energy, agriculture, industrial and precious metals, primarily through futures contracts. The Fund may also invest up to 10% of net assets in bitcoin futures or exchange-traded products that hold bitcoin. Its enhanced roll process seeks to improve the economics of maintaining futures exposure as contracts approach expiration.

Commodity prices respond to supply and demand forces that can differ substantially from those driving corporate earnings and equity valuations. Energy shortages, weather disruptions and changes in industrial demand can create investment opportunities outside traditional stock and bond markets. Broad exposure spreads participation across commodity sectors with different underlying drivers.

That can be particularly useful when inflation or supply constraints pressure equities. Rising input costs may weigh on corporate margins while supporting the prices of the commodities responsible for those pressures. GCC gives portfolios exposure to that potential offset. Its diversification benefits depend on the environment, however: commodities can decline alongside stocks during a growth scare, and bitcoin exposure introduces additional volatility.

Figure 3: Excess Return: GCC vs. S&P 500 When S&P 500 Falls More Than 1σ

Preparing Portfolios for the Next Bout of Volatility

WTMF, WTPI and GCC offer different ways to broaden a portfolio’s sources of return while serving as decorrelated, diversifying influences during episodic volatility. Trend following can adapt to changing market direction, option premium income can help cushion equity-related losses and commodities can provide exposure to economic forces that otherwise pressure traditional assets. Evaluating their behavior on difficult equity days helps put those potential benefits into practical terms.

For investors concerned about renewed volatility, these strategies can help build a more resilient allocation before the next selloff arrives. Their downside mitigation potential should be assessed alongside their individual risks, recognizing that relative outperformance can still involve losses and that historical results do not guarantee future protection.