How to diversify with bitcoin, gold and alternative investments

Key insights for advisors on diversification

• Elevated market concentration and stock/bond correlations make digital assets, precious metals, and liquid alternative strategies attractive sources of potential diversification.
• Alternative assets and strategies with low correlations to traditional assets may be able to reduce portfolio risk without sacrificing upside.
• BlackRock’s Target Allocation with Alternatives models utilize exposures to gold and bitcoin, and liquid alternatives as diversifiers.

What’s happening in today’s markets and what does it mean for diversification?

Geopolitical and economic shocks have become more common, and their impacts have been felt across markets and portfolios. From Russia’s invasion of Ukraine in 2022, to President Donald Trump's announcement of tariffs on ‘Liberation Day,’ and most recently conflict in the Middle East, it is crucial for investors to be deliberate about how they diversify portfolios.

We believe advisors today should consider taking a more creative approach to diversification for risk management. Since 2020, the traditional role of bonds as an effective diversifier from stocks has come into question. From the Federal Reserve’s rapid rate hikes in 2022 to today’s uncertain economic and geopolitical outlook, it’s been a bumpy ride.

Figure 1: Stock and bond volatility and correlation changes: 2010s vs. 2020s

What it means: Since 2020, stocks and bonds have seen elevated volatility and heightened correlation to each other. This is a sharp contrast from the relatively lower levels of risk throughout the 2010s, and a negative correlation. Elevated volatility coupled with heightened correlation means more risk for the same reward.

To achieve a balanced portfolio today, advisors may need to look for other sources of diversification. With many options to choose from, we segment these alternative sources into two broad categories: alternative assets and alternative strategies.

What’s the difference between alternative investments and alternative strategies?

The term “alternatives” in investing is often used broadly to describe anything outside traditional publicly traded stocks and bonds.

• Alternative investments are investments that fall outside traditional public equities and fixed income. These include private markets (such as private equity and private credit), real estate, infrastructure, commodities, and more recently, digital assets. What defines them is not how they are managed, but the underlying assets themselves. Many of these exposures can be accessed in index and active strategies, with liquidity varying greatly as gold and other commodities are relatively liquid, while private markets are relatively illiquid.
• Alternative strategies, by contrast, refer to how investments are managed, rather than what is owned. These strategies are commonly associated with hedge funds and quantitative investors and include approaches such as long/short equity, market neutral, event-driven, and global macro. While considered “alternative” because they differ from traditional long-only investing, alternative strategies often utilize conventional asset classes like publicly traded stocks, bonds, currencies, and derivatives.

In short, alternative asset classes describe what you invest in, while alternative strategies describe how you invest.

How do alternative strategies compare to traditional diversifiers?

A healthy portfolio employs diversifiers to reduce risk and balance return drivers. Traditional diversifiers such as bonds may provide downside protection, but they can lose effectiveness when correlations with equities rise. In contrast, many alternative strategies are designed to have lower correlation to broad markets by accessing differentiated sources of return. Importantly, correlation alone does not tell the full story. Beta, or the magnitude of sensitivity to markets, is an important lens. While some alternative strategies may exhibit higher correlation at times, lower or more controlled beta can be critical in shaping more resilient risk-adjusted returns.

Alternative strategies span a range of approaches that seek to generate returns independent of traditional markets. Market-neutral strategies use quantitative models to take offsetting long and short positions, seeking to isolate stock-specific alpha with minimal market exposure. Macro and multi-asset strategies dynamically allocate across equities, rates, currencies, and commodities, often using derivatives to express economic views. Multi-strategy approaches combine several systematic return streams, while event-driven strategies focus on corporate catalysts such as mergers or restructurings. Together, these approaches emphasize flexibility and diversification across market environments.

Figure 2: Average monthly returns when stocks are negative, 2022-2026

What it means: Alternative diversifiers like gold and liquid alternative strategies have delivered ballast to portfolios when equities have declined.

What types of liquid alternatives can help diversify a portfolio?

There are many flavors of liquid alternatives that can introduce the benefits of diversification to a whole portfolio. These can include strategies such as market neutral, long/short equity, managed futures, global macro, merger arbitrage, and multi-strategy funds. Examples of alternative strategies from BlackRock include:

• The BlackRock Global Equity Market Neutral Fund (BDMIX) seeks to capture that stock dispersion across thousands of equity longs and shorts to deliver attractive returns without market beta.
• The BlackRock Tactical Opportunities Fund (PBAIX) seeks to deliver growth that is lowly correlated to traditional stocks and bonds by tactically trading long and short in equities, sovereign bonds and currencies.
• The BlackRock Systematic Multi-Strategy Fund (BIMBX) seeks to deliver alpha above fixed income returns by combining a fixed income sleeve that can participate in today’s higher yields with a defensive alpha sleeve that provides an alternative source of diversification.
• The BlackRock Event Driven Equity Fund (BILPX) seeks to deliver long-term capital growth by investing primarily in equity and equity-related securities of companies that are undergoing transformative corporate events, including announced mergers and acquisitions, spin-offs and split-offs, financial or strategic restructurings, management changes and other catalysts.

Figure 3: Liquid alts strategies can deliver low volatility across multiple horizons

What it means: In varying time horizons, liquid alternatives have proven their ability to adapt to new environments. BDMIX, PBAIX, BIMBX, and BILPX are designed to deliver standalone, diversifying return streams with different core drivers. Because each product is built to work in distinct conditions, leadership may rotate across equity and rate environments.

What about gold and bitcoin? How can they offer diversification even as high-risk, standalone assets?

We’ve also seen alternative assets provide valuable diversification.

• The iShares Gold Trust (IAU), which aims to track the price of gold, has exhibited a very low correlation to equities over the past year, despite strong performance from both assets.¹
• The iShares Bitcoin Trust ETF (IBIT), which aims to track the price of bitcoin, also has low correlation to equities relative to traditional asset classes: the correlation between bitcoin and the S&P 500 has been 0.53 since 2022, while gold’s correlation to stocks has been 0.19.²

The iShares Trusts are not investment companies registered under the Investment Company Act of 1940, and therefore are not subject to the same regulatory requirements as mutual funds or ETFs registered under the Investment Company Act of 1940.

Figure 4: Monthly annualized risk and return correlations to S&P 500 Index, 2022 – Q1 2026.

What it means: Alternative assets have exhibited relatively low correlations to stocks despite elevated risk profiles. Although these assets can be volatile, drivers of return differ from equities, leading to effective diversification potential.

Combining gold and bitcoin in a portfolio can produce results that are even more compelling, since these strategies can benefit from having lower correlations to each other as well.

Figure 5: Correlation matrix of stocks, bonds, and alternative assets and strategies, 2022-2026

What it means: Gold and bitcoin have exhibited low correlations not only to stocks and bonds, but also with each other (0.10). This means that they may help provide diversification in a portfolio that combines both assets.

How can advisors pick alternative diversification sources?

At BlackRock, we employ a three-step process when looking for diversifying alternatives.

1. We look first at correlation vs. traditional assets, notably stocks because they generally drive the bulk of a multi-asset portfolio’s volatility.
2. Next, we look at returns, and more specifically, rolling returns over a long horizon. We’re looking for strategies that have been able to deliver consistent returns in excess of cash.
3. Then, we look at the volatility profile of each strategy, and evaluate whether the potential return per unit of risk is worth it. For example, an asset may have low correlation to stocks, but if it also carries outsized volatility, the downsides may outweigh the benefits in a portfolio.

Three step process for screening diversifiers in a portfolio

Where to consider funding alternatives in a portfolio?

After selecting an alternative diversifier, the next step is considering how to source the new allocation. The BlackRock Target Allocation Model Portfolio Solutions team funds most of their alternative allocations from fixed income.

The exception to this funding decision is bitcoin: we believe its much higher volatility profile makes equities a more appropriate funding source. Note too that with such a high volatility profile, a little bitcoin can go a long way.

Conclusion: A new regime calls for new ways to build portfolio diversification

BlackRock anticipates that alternatives will continue to play a critical role in portfolio construction. Elevated correlations may continue, resulting in unreliability of traditional diversifiers in providing ballast. While diversification may not always protect against investing risk, we believe it is essential to building more resilient portfolios.

BlackRock can help you determine how best to build liquid alternatives into your portfolio construction process. You can find more information on the latest BlackRock Target Allocation model rebalance here , or explore the impact of alternative strategies on your own portfolio using our Advisor Center portfolio tools.

To learn more about what’s driving markets and how it shapes portfolio allocations, explore the Spring Investment Directions.

Oliver Hering, Sam McClellan, Erin Manifase, Emily Fredrix Goodman, and Emily Bond contributed to this article.

Glossary

Alternative assets - Investments that fall outside traditional public equities and fixed income. These include private markets (such as private equity and private credit), real estate, infrastructure, commodities, and digital assets. What defines them is not how they are managed, but the underlying assets themselves, which are often less liquid and not publicly traded.

Alternative strategies - How investments are managed, rather than what is owned. These strategies are commonly associated with hedge funds and quantitative investors and include approaches such as long/short equity, market neutral, event-driven, and global macro. While considered “alternative” because they differ from traditional long-only investing, alternative strategies often utilize conventional asset classes like publicly traded stocks, bonds, currencies, and derivatives.

Beta - Measures how sensitive an asset’s returns are to movements in a broader market or index. A beta of 1 means the asset moves in line with the market, above 1 indicates greater sensitivity, and below 1 indicates lower sensitivity.

Correlation - A statistical measure of how stock and bond returns move together over time, ranging from −1 (move perfectly opposite) to +1 (move perfectly together), with 0 indicating no relationship.

Diversifiers - Assets or strategies included in a portfolio that exhibit low or negative correlation to traditional core holdings such as equities and bonds, with the goal of reducing overall portfolio risk and volatility, and improving risk-adjusted returns. By behaving differently across market environments, particularly during periods of stress, diversifiers help offset losses in other parts of the portfolio and enhance overall resilience, even if their standalone returns may be lower or more variable.

Liquid alternatives (alts) - Investment strategies that employ hedge fund–like approaches, such as long/short, market neutral, or global macro, but are offered in liquid, publicly traded vehicles that provide regular pricing and investor access, typically through mutual funds or ETFs.

Liquid/liquidity - How easily an asset can be bought or sold in the market without significantly affecting its price. Highly liquid assets can be traded quickly with minimal price impact, while less liquid assets may require more time to transact and may involve larger price concessions.

Hedge fund style strategies in a 40 act mutual fund – Utilizing investment approaches typically associated with hedge funds, such as long and short positioning, derivatives, leverage, and market neutral or alternative premia strategies, within a U.S. mutual fund structure governed by the Investment Company Act of 1940. This allows investors to access more complex return strategies with the benefits of daily liquidity, transparency, and regulatory oversight.

Volatility - The degree of variation in an asset’s price over time, typically measured by how much and how frequently returns deviate from their average. Higher volatility means larger and more frequent price swings, indicating greater uncertainty or risk, while lower volatility reflects more stable and predictable price movements.

Risk Management - The process of identifying, measuring, and controlling potential sources of loss within a portfolio by balancing exposures across assets, factors, strategies, and more. It involves techniques such as diversification, position sizing, and hedging to manage volatility and drawdowns while aiming to achieve a desired return profile.

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