Investors Scramble to Adapt as Market Mayhem Upends Strategies

NEW YORK – As stocks plunged into bear market territory on Monday, financial advisor Tom Brennan fielded a flurry of panicked calls from clients. “People are scared,” said Brennan, who manages $250 million at Bedrock Wealth Management in Chicago. “They’re seeing their retirement accounts down 20, 30 percent and wondering what to do.”

The S&P 500 has tumbled 22% this year, erasing over $9 trillion in market value. Bonds, typically a safe haven, have provided no refuge – the Bloomberg U.S. Aggregate bond index is down 15%. Even gold is off 9%.

“There’s Nowhere to Hide”

“In a normal downturn, you can shift to defensive sectors or high-quality bonds,” explained Anil Gupta, chief investment officer at Weiss Multi-Strategy Advisers, which manages $4.2 billion. “But there’s nowhere to hide this time. Everything is getting hit.”

The unusual synchronized selloff has upended traditional investing playbooks. The classic 60/40 portfolio – 60% stocks and 40% bonds – is on track for its worst year since 1937, down 21%. Risk parity funds, which balance risks across asset classes, have plunged 18%.

Forced Selling Feeds on Itself

Steep losses are triggering margin calls and forced liquidations, further pressuring prices. “The speed and breadth of the declines are forcing people to sell what they can, not what they want to,” said Gupta. “It feeds on itself in a doom loop.”

Pensions and endowments that rely on the 60/40 mix may have to cut spending or raise cash to meet obligations. The California Public Employees’ Retirement System, the nation’s largest public pension fund at $440 billion, is down an estimated 14% this year.

Retail Investors Frozen in Headlights

Small investors, who piled into stocks and crypto during the pandemic boom, have been particularly hard hit. “A lot of retail investors are frozen like a deer in headlights,” said Brennan. “They don’t know whether to bail out or hang on.”

Brennan is advising most clients to stay the course, tax-loss harvest where they can, and maybe even nibble at beaten-down quality stocks if they have cash. But he worries some will panic and liquidate at the bottom. “Emotions are running high. People are not thinking rationally.”

Quant Funds Caught Off Guard

Many quantitative hedge funds have been blindsided as well. Statistical models trained on decades of market data are struggling to navigate the new regime. Trend-following commodity trading advisers (CTAs) have tumbled 6.4% in the last month alone as price trends reversed.

“The moves have been so violent and swift that models can’t adapt,” said Andrew Beer, founder of Dynamic Beta Investments, which replicates hedge fund strategies for clients. “By the time they flip positioning, the markets have already turned.”

Hunting for Havens

With the traditional 60/40 under assault, investors are desperately searching for new ways to mitigate the mayhem. Some are turning to private markets like real estate, infrastructure and private credit, hoping they will be more stable and less correlated to public markets. Others are exploring alternative hedges like market neutral, long-short equity, and tail risk strategies.

“We’re seeing a lot of interest in uncorrelated alternative investments that can provide some ballast to a portfolio,” said Beer. His own firm’s managed futures replication strategy is up 22% this year.

But even these alternatives carry risks and are not immune to market pressures. Private assets are vulnerable to rising rates and economic downturns. Many hedge funds have disappointed during recent selloffs. And strategies like tail risk hedging and put options are expensive and bleed cash in rising markets.

As central banks tighten, inflation rages, and the global economy teeters on the brink of recession, one thing is clear: the old investing playbook is defunct. Investors will have to get creative, stay nimble, and rethink their approach for the new market reality ahead.