In Praise of High-Volatility Alternatives

This piece argues that while compound returns and volatility drag matter greatly at the total portfolio level, they can be misleading guides when applied to individual line items, especially small, diversifying alternatives. High-volatility, uncorrelated strategies—such as leveraged market-neutral equity—can be far more capital-efficient than their low-vol counterparts, allowing investors to commit fewer dollars while maintaining or improving overall portfolio risk-adjusted returns. The examples show that adding higher-vol alts can raise a portfolio’s long-term compound return and even restore room for traditional assets like bonds once position sizes are right-sized and leverage is used thoughtfully.

The central requirement is disciplined rebalancing: investors must systematically trim winners and add to losers so that the volatility of these line items works for the whole portfolio rather than against it. The main risk is behavioral rather than mathematical; high-vol alts are hard to stick with during deep drawdowns or unusual environments, yet those who can tolerate the swings may achieve meaningfully better long-run outcomes than those who default only to “palatable” low-vol versions.