Portfolio Manager Luke Newman explains why in a turbulent market characterised by higher dispersion, unstable stock-bond correlations and renewed focus on downside protection, absolute return strategies may offer resilience.
Uncertainty and chaos favours stock picking
For much of the quantitative easing era, equity markets were shaped by low discount rates, abundant liquidity and a narrow set of dominant return drivers. Growth stocks, particularly US technology companies, led markets higher, while many other areas struggled to attract investor attention. For bottom-up investors, that created a challenging backdrop: correlations were high, dispersion was low and opportunities to generate differentiated alpha were more limited.
That environment began to shift in 2022 as we saw the return of the cost of capital when central banks moved decisively away from near-zero interest rates. We believe we are seeing a return to market conditions in which equity long/short strategies can be more effective. Investors also look to be agreeing with this view. Higher interest rates have led to the return of the cost of capital, made business fundamentals more important, and increased the dispersion between ‘winners and losers.’
In our view, dispersion matters because it gives active managers more to work with. When share prices move together, it is harder to build a portfolio that is genuinely independent of broader market direction. When company-level outcomes diverge, stock selection can become a more powerful driver of returns.
Looking beyond the 60/40 portfolio
The changing market backdrop is also forcing investors to reassess traditional asset allocation assumptions. The 60/40 portfolio has historically relied on bonds providing diversification when equities sell off. But in an environment of stickier inflation, higher rates and greater policy uncertainty, the relationship between equities and bonds has become less dependable.
Since 2022, bonds’ role as a reliable diversifier has been called into question
Source: Bloomberg, Janus Henderson Investors analysis, as at 29 December 2025.
Correlation between bonds (US 10-year Treasuries) and equities (S&P 500 Index) returns. Past performance does not predict future returns.
Recent market shocks have shown that equities and fixed income can come under pressure at the same time. This has increased interest in strategies that seek to deliver positive returns over time without relying primarily on market beta. Absolute return strategies are not a substitute for diversification, but they may help broaden the sources of return within a portfolio.
We believe the key to successful investing is not to add complexity. It is to identify liquid, transparent strategies that can offer differentiated return streams without relying heavily on leverage or illiquid assets. In this context, equity long/short strategies can play a useful role because they invest in familiar listed equity markets while retaining the flexibility to express both positive and negative views.
Luke Newman, Portfolio Manager
Avoiding large losses can be as important as capturing upside
The objective of an absolute return strategy is not to outperform a benchmark, but to aim to generate a consistent, positive return over time with lower sensitivity to broad market moves. A key feature is that minimising large drawdowns is not a secondary objective; it is central to the role absolute return strategies are designed to play in client portfolios.
Our experience during previous crises highlights this point. During the Global Financial Crisis, the team’s company-level research gradually led it to become increasingly cautious on banks, insurers and highly leveraged consumer-facing companies. The positioning was built stock by stock, rather than through a top-down macro call, and helped the strategy navigate the period with negative net exposure.
The Covid-19 crisis required a very different response. Rather than having a long period to reposition, markets moved rapidly. We were able to respond by using our flexible and liquid approach to reduce risk and add tactical shorts in areas such as travel, leisure and consumer-exposed companies that were likely to be affected by pandemic restrictions.
These examples illustrate an important feature of our approach: while macro awareness matters, our process remains rooted in fundamental stock research. The team aims to identify where risks are building at the company level and then use portfolio construction to try and reflect those risks quickly and efficiently.
Combining core convictions with tactical flexibility
We believe a complementary portfolio of core and tactical positions can work well. The core book consists of high conviction fundamental long and short positions. These are typically based on meaningful expected upside or downside, driven by factors such as management change, strategic repositioning, mergers and acquisitions, disposals, capital allocation or valuation anomalies.
Meanwhile, smaller tactical positions enable a quicker response to shorter-term dislocations, factor rotations and market stress. Positions are generally smaller and more flexible, and are aimed at capturing temporary mispricing opportunities, and may also be useful in times of sharp market sell-offs.
Investors are increasingly recognising the value of liquidity
As investors allocate more to alternatives, liquidity has become an increasingly important consideration. Private market strategies can play a valuable role in portfolios, but they may also involve long lock-up periods and limited flexibility. By contrast, a liquid alternatives strategy investing in large-cap listed equities can offer daily liquidity while still seeking differentiated return outcomes. Liquidity allows exposures to be adjusted quickly, manage risk during periods of stress, and provide investors with flexibility in their broader asset allocation.
Building resilience with absolute return strategies
In recent years, the post-quantitative easing (QE) environment has created a more complex investment landscape, but also a richer opportunity set for active managers. Higher dispersion, more volatile correlations and renewed focus on capital preservation all support the case for strategies that can be flexible, liquid and genuinely differentiated from traditional equity and bond exposures.
For investors seeking to build more resilient portfolios, absolute return strategies may offer a way to access company-specific opportunities while aiming to reduce dependence on broad market direction. In an environment where traditional diversification tools may be less reliable, we think an active approach combining stock selection, risk control and liquidity is likely to become increasingly valuable.
Note: Diversification neither assures a profit nor eliminates the risk of experiencing losses.
S&P 500 (Standard & Poor’s 500) is a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States.
US 10-year Treasury note is a long-term debt instrument issued by the Department of the Treasury to finance the US government’s spending needs.
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