Diversified Wall Street Investors Are Finally Winning

Wall Street’s diversification-focused professionals are welcoming a shift in the market landscape.

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Amid the ongoing tariff war, investors have been pulling money out of U.S. stocks at a notable pace, leading to strong performances in alternative assets. A Treasury index has climbed nearly 3% this year, while gold and corporate debt have also outperformed. This shift marks a long-awaited return to a more balanced investment environment, benefiting those who advocate for diversified strategies.

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For years, some of the industry’s top minds have promoted multi-asset approaches designed to spread out risk. However, these strategies have struggled to keep up with the relentless rise of U.S. equities since the financial crisis.

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Now, as the S&P 500 remains in correction territory, closing last week 0.5% higher, previously overlooked investment vehicles are beginning to shine. Quantitative investment strategies, hedged portfolios, and multi-asset funds are all gaining traction. The RPAR Risk Parity ETF, which allocates funds across asset classes like commodities and bonds, has surged over 5% this year—outpacing the S&P 500 by roughly 9 percentage points.

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This shift is a welcome development for investors like Meb Faber, a strong proponent of diversification. He and others have long championed the wisdom of spreading risk, an approach dating back to ancient times. “It feels like this has been a long time coming,” said Faber, who founded Cambria Funds. “Does three months make a trend? We’ll see. But these kinds of shifts don’t usually last just a quarter.”

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Before 2025, one of Faber’s diversified portfolios had lagged behind the S&P 500 in 14 of the past 16 years—a stretch he called a “bear market in diversification.” This year, however, his global asset-allocation ETF (GAA) is up 3%, setting it on track for its best relative performance against the S&P 500 since its inception.

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It remains uncertain whether this trend will persist. In both 2011 and 2022, U.S. stocks underperformed global diversified portfolios but later rebounded as economic optimism returned. Still, after years of strong gains, American households now hold a record-high percentage of their assets in stocks.

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This suggests that investors may be open to diversifying into other asset classes. Additionally, the expansion of ETFs has made alternative investment strategies more accessible, providing diversification advocates with new opportunities.

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Market movements in recent months have illustrated this shift. Long-term U.S. Treasuries, which suffered losses for four consecutive years, have rebounded sharply due to rising demand for safe-haven assets and signs of slowing economic growth. The iShares 20+ Year Treasury Bond ETF (TLT) has outperformed the equity market in seven of the past eight weeks, a feat last seen in 2014.

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The bond market’s recovery has also benefited the classic 60/40 portfolio, which allocates 60% to stocks and 40% to bonds. A Bloomberg model tracking this strategy has outpaced the S&P 500 this year. Meanwhile, gold—widely regarded as the ultimate safe-haven asset—has reached record highs, posting gains in nearly every week of 2025. This rally has also propelled commodity indexes to their largest weekly gain in two months.

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More complex investment approaches are also seeing success. Quantitative strategies that select stocks based on factors such as value and momentum have performed well. The Bloomberg GSAM U.S. Equity Multi-Factor Index has risen in three of the past four weeks, pushing its year-to-date return to 2.5%. Investors using options to hedge risk or generate income have also fared better than those simply holding S&P 500 stocks.

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“Diversification has provided its intended benefits during this period of market turbulence,” said Mayukh Poddar, senior portfolio manager at Altfest Personal Wealth Management.

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Large institutional investors appear to be pulling money from U.S. equities in search of better returns elsewhere. According to Bank of America’s latest survey, fund managers reduced their exposure to American stocks at a record pace this month while increasing their allocations to European and emerging markets.

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Despite this shift, retail investors remain reluctant to abandon their habit of buying the dip—particularly in technology stocks. Wall Street data suggests that individual investors continue to jump back into the market every time prices decline, expecting an immediate rebound.

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“Many investors, especially over the last few years, have grown accustomed to seeing stocks bounce back quickly after every pullback,” said John Flahive, head of fixed income at BNY Wealth. “For that psychology to change, we would need a market environment where stock prices don’t immediately recover.”

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With U.S. equity valuations stretched, technology stocks dominating the market, and the economic outlook uncertain, it makes sense to consider a range of strategies—including those that hedge against both rising and falling prices, according to Pete Hecht, head of North America portfolio solutions at AQR Capital Management.

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AQR is among a growing group of firms promoting a strategy known as portable alpha. This approach uses derivatives to replicate the returns of traditional stock indexes while investing excess cash in hedge fund strategies, such as trend-following and market-neutral equities. Among the six ETFs employing this technique, half have delivered positive returns this year.

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“I’d argue that diversification is even more crucial now than usual,” Hecht said. “I wish I had a crystal ball—if I did, I’d invest only in the best-performing market. But in reality, timing the market is incredibly difficult.”

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