While liquid alternatives go with the flow, commodities are steady

This article was written by Jigna Gibb, Head of Commodities and Crypto Product Management at Bloomberg.

The markets have started 2025 with a splash triggered by Deepseek and the uncertain path of rates. The US has a returning President with a firm agenda and potentially rippling impacts for domestic and international policies. Global equities markets are exaggerated relative to valuations. Elevated inflation, and pivots in cutting rates cycles with rhetoric of “higher for longer”, sent waves across equities and bond markets at the start of this year. We assess the opportunity to diversify equities risk using liquid alternatives to ride out potential disruptions on the horizon.

Liquid Alternatives are mainly considered for two features; first, diversification against equity risk which can result in dampening long-term portfolio volatility and second, to be tradeable in all market conditions so that risk capital can easily be redeployed, particularly in episodes of stress.

For our analysis, we consider hedge funds, CTAs, QIS and long-only Commodities as liquid alternative candidates. Hedge funds can traditionally use short positioning and leverage. Most CTAs models are multi-asset momentum-based strategies. Quantitative Investment Strategies (QIS) are cross asset factor-based systematic strategies, often targeting carry, curve, momentum and value premia. Commodities are represented by Bloomberg Enhanced Roll Yield (BERY) index which is a roll enhanced dynamically weighted strategy, closely tracking the broad-based Bloomberg Commodities (BCOM) index, and can target spot, curve, and carry components of returns. In our analysis we scale the historical timeseries to 20% to match the long-term volatility of equities and make a fair comparison between these strategies. Where available, we reference total return series to track a fully funded investment.

Over the past 24 years we see the nature of these liquidity alternative strategies against equity returns in trendline chart of exhibit 1 – commodities can provide gains on the upside but can suffer when equities fall, although by not as much as the hedge fund index. On the other hand, CTAs can go 100% short hence they behave defensively in these environments while the QIS strategy is balanced in nature.

Diversification tested over time

Liquid Alternatives have been exponentially growing in popularity – according to Preqin the AUM in alternative investments is expected to balloon 2.5 times from current levels to $24 trillion by 2028. While real assets such as private equity may struggle to directly implement capital with new opportunities drying up, liquid alternative investments could benefit from these asset allocation flows.

In the comparison table below, we highlight the key features of the different liquid alternative strategies. While hedge funds and CTAs have been in existence for multiple decades and have long track records, hedge funds’ constraints on quick exits in stress scenarios and minimum size requirements are limiting factors. On the surface QIS can offer decent trading flow, however there are question marks around reliability of future performance based on their short-lived record. The balance can be found with the middle ground of long commodities which have weathered the test of time and have low hurdles on liquidity and investment size.

We measured the long-term correlations based on quarterly returns of these liquid alternative strategies against equities and bonds since 2001 to find that Commodities, QIS and CTAs are diversifiers against traditional assets. CTAs show negative correlations with their ability to take 100% short holdings in equities and bonds. Finally, when it comes to explaining the drivers of day-to-day performance and risk attribution, commodities indices offer a more transparent breakdown of granularity compared to the opaque drivers in hedge fund, CTAs and QIS investments.

Commodities remain above water

Market regimes are evolving so it is important to consider strategy performances out of the sample above, as well as the long-term historical backtests. There have been several episodes post-Covid where market dislocations have seen equities and bonds sink and traditional correlations have dislocated – it has been in those environments when allocators with liquid alternatives allocations have stayed afloat. In 2022 and the first few weeks of 2025, we saw traditional assets underperforming, hedge funds were not positioned correctly and momentum strategies in CTAs / QIS were unable to latch onto price action trends – this was when we saw long Commodities deliver diversification characteristics.

Commodities are the steady choice in liquid alternatives

Investors in liquid alternatives might consider allocations in commodities, hedge funds, CTAs and QIS. When we compare their key characteristics, we find that commodities offer a middle ground relative to other liquid asset strategies. In its role as a diversifier to traditional assets, commodities alongside CTAs and QIS have historically generated neutral correlations and positive returns in recent equities stress periods. When it comes to scenarios of market shocks, commodities indices have the benefit of daily liquidity with low minimum size requirements which allows allocators to capture profits and put those proceeds back in action.  Finally, performance and risk attribution in a long investment in commodities is much more transparent and straightforward to explain versus other liquid alternative strategies.

When it comes to liquid alternatives, one can drown in the available options or keep your head above the surface with the steady option of long commodities.