Multi asset: resilience in a V-shaped market recovery

President Trump’s Liberation Day tariffs triggered a sharp market decline in April that was subsequently reversed by his decision to pause these tariffs. Such V-shaped trading patterns are notoriously difficult for risk-based investors to manage – taking too much risk off during the decline can mean portfolios are under-exposed when the rally commences. In line with our philosophy of continuous research, the Q3 issue of Simply put details how the All Roads strategy team have examined past instances of V-shaped recoveries to better prepare our investment process for such episodes in the future.  

The CIO’s perspective: the value of historical data to assess patterns

A common error in asset management is to view contemporary market conditions as uniquely unprecedented. Yet, dismissing past experiences means valuable historical insights may be missed. While the triggers of market shocks change over time,  unfolding market patterns and investor behaviour are often repeated. We place significant value on historical data and consistently seek to identify parallels with previous market episodes, using patterns, relationships and consequences to inform our process.

Our analysis shows that from 2000 to 2025, V-shaped recoveries occurred with a historical frequency of approximately 7%, with episodes lasting 16 days per annum. The occurrence of these market events fluctuates considerably: certain years avoided such episodes, while in other years they characterised up to a third of trading days. Significantly, V-shaped market patterns tend to cluster around periods of crisis. This suggests 2025 should not be regarded as exceptional. However, the performance of various assets and investment strategies tells a different story. 

FIG 1. Sharpe ratios of asset classes and quantitative strategies over different periods²

 
Figure 1 shows the Sharpe ratios across various asset classes (including bonds, equities and commodities) and also key systematic strategies (trend, carry and macro). The charts present these realised Sharpe ratios over the long term, during historical V-shaped recoveries and in Q2 2025. This comparative analysis highlights that: 

• The Sharpe ratios of cyclical assets have been remarkably high during these periods, but in 2025, the magnitude of the Sharpe ratios was marginally lower
• Historically, hedging assets (commodities and bonds) have demonstrated limited utility during such periods, meaning diversification has not been rewarded. However, in 2025, precious metals have performed exceptionally well (possibly due to the USD weakness)
• These episodes typically present challenges for systematic strategies, with only carry strategies benefiting. 2025 broadly conforms to this pattern, although even carry strategies failed to deliver returns to investors.
   

From this perspective, systematic solutions that delivered flat to marginally positive performance during the period demonstrated relative resilience.

Read more: The here and now: when markets react more to short-term conditions

Portfolio positioning: cautious without being overly defensive

V-shaped markets always keep risk-based managers on their toes and Q2 was no exception. Uncertainty dominated throughout the period and our indicators and positioning reflected this ambiguity. Now that clearer skies are ahead, we find that our strategies are positioned differently than they were three months ago. 

Our analysis of different assets shows that risk metrics haven’t fully normalised yet (Figure 2). Duration volatility remains firmly in the higher risk zone. This persistence stems from various factors, ranging from ongoing inflation concerns to markets’ fiscal anxieties, and remain unresolved as we enter Q3. Our volatility estimates for developed market (DM) equities are remarkably close to those of emerging market (EM) equities. This anomaly may have resulted from trade tensions: earnings growth for DM companies remains threatened by macroeconomic impacts. 

FIG 2. Risk premia volatilities³

With trend signals little changed over the quarter and macro signals remaining muted, we looked to investment signals to gauge investor sentiment. All three have recovered from their lows, but not to the same degree, and with hedging demand remaining substantial, investors appear somewhat unconvinced by realised market performance.

Meanwhile, valuation signals continue to position bonds in opposition to equities and credit spreads, with bonds being ‘cheap’ while equities remain ‘expensive’ for the time being. The most compelling medium-term opportunities are among long-term Japanese, UK and US bonds. 

From an asset allocation perspective, our portfolios now closely approximate neutrality. Minor deviations from neutral include a slight underweight in bonds – reflecting heightened risks and negative momentum – and an overweight in credit, in light of positive trends. However, in terms of total market exposure, the de-risking that occurred following Liberation Day is still apparent – a posture we would characterise as cautious, but not overly defensive.

Macro: elevating macroeconomic risks

There were clear fundamental reasons behind Q2 market behaviour. Liberation Day potentially initiated the biggest trade war of the past 125 years, which could see global profits and creditworthiness significantly deteriorate. The panic that followed was therefore not irrational, nor was the positive response to the 90-day pause. So, did economic fundamentals support Q2’s rapid recovery, and will such market optimism remain in Q3?

An analysis of the nowcasting signals during past V-shaped recovery periods tells us that such episodes tend to occur when growth is below potential, which markets mistakenly interpret as more severe downturns. Following the Liberation Day tariffs announcement, several observers noted that recession probabilities had increased; yet, a significant factor that contributed to the subsequent recovery was growth resilience. As we commence Q3, our growth indicator is now retreating, suggesting that elevating macroeconomic risk factors could reduce the probability of Q2's positive outcome being repeated.

Read more: US economy: peak uncertainty as growth indicators misfire 

A portion of the deterioration in our macro indicators originates from the US (Figure 3). While US economic growth continues to be underpinned by a resilient employment market, a reasonably evolving housing sector and only a marginal deterioration in investment outlook, weakness stems from declining consumption and production expectations. In addition, the Federal Reserve's decision to maintain rates in June and limit the total number of cuts in 2025 could potentially constrain US growth prospects in Q3. In terms of inflation, Trump’s trade tariffs were expected to generate inflationary pressures. Yet, our indicator currently points to economic resilience in the US creating more inflationary pressure than the tariffs themselves. 

FIG 3. US growth and inflation nowcasters decomposition⁴

If US growth is more subdued in Q3, the probability of another V-shaped recovery would diminish, and negative developments could potentially produce more sustained and enduring market effects.

Read more: How have the equity market’s risk and return dynamics changed in 2025?

Special focus: measuring beta participation

V-shaped recoveries are a concern for risk-based investors as such recoveries feature rapidly mean-reverting volatility cycles that contradict the fundamental rationale of risk-based investing. Consequently, we investigated how our investment solutions respond to such environments; notably, we examined our asymmetric response to this symmetric market shock – specifically, our beta participation. 

First, we looked at the historical relationship between equity performance and the performance of our All Roads balanced risk strategy. This analysis found that during the initial phase of V-shaped periods, our strategy captured only 9% of the equity downside; in the second phase, our strategy captured approximately 11% of the equity upside⁵. This outcome constitutes beta asymmetry – ie our strategy provided protection during declines while capturing subsequent rapid appreciation. 

This beta asymmetry is quite uncommon in our industry. The distinction is that our approach utilises a more diverse investment universe, implements overlays, and the addition of dynamic drawdown management reduces global exposure during adverse periods while increasing market participation during favourable ones. To measure the effect of this ‘enhanced diversification’ element, we compared our performance against a naïve risk-based solution. Again, diversification appeared more pronounced after the V-shaped recovery than during the decline. So, how does this asymmetry evolve over time?

During drawdown periods, our strategy naturally reduces market exposure, protecting capital by increasing cash allocations. Subsequently, when markets begin to rally, an opportunity cost emerges. Our drawdown management's re-risking process utilises this opportunity cost as a metric to guide portfolio reallocation. The consequence is that our beta asymmetry increases as a function of time, helping offset the negative impact of these challenging market conditions, as illustrated in Figure 4’s comparison to a naïve risk-based solution. In the case of our strategies, dynamic drawdown management rewards patient investors as participation increases with time. This characteristic has historically constituted a significant component of our strategies' value proposition: balancing risk-adjusted returns to avoid underperformance over longer time horizons.

FIG 4. Asymmetry in All Roads’ beta as a function of the holding period⁶

Read more: US credit-default swaps show rising risk. Should investors worry?

New research: the merits of commodities as an inflation hedge

Maintaining commodities as a long-term inflation hedge in portfolios is often likened to carrying an umbrella every day, despite infrequent rain.  To explore this analogy, we conducted an in-depth evaluation of the merit of commodity hedges.

The foundational argument for including commodities in a diversified portfolio is that they enhance diversification. However, our analysis found that an investor who consistently rolled future-based commodity exposures from 1980 to the present would have earned less money than that yielded by market instruments. So, while geopolitical tensions might temporarily reward an exposure to commodities, this investment would seem to constitute a portfolio impediment most of the time. 

Nevertheless, our experience differs somewhat. Our commodity allocation derives from a risk-based methodology combined with a carry-enhanced approach that has demonstrated partial resilience against this declining trend, notably by underweighting energy and overweighting other commodity sectors. Moreover, commodities have historically exhibited persistent trends, resulting in superior trend-following performance compared to other asset classes. This means while commodities may prove costly over extended periods, they can potentially be timed effectively using trend-following methodologies that activate commodity exposures when positive trends emerge. Conversely, when trends turn negative, reduced or nil commodity exposure could be maintained. 

FIG 5. Performance plots of trend-activated vs standard BCOM Index⁷

  
A straightforward experiment comparing such ‘trend activation’ with conventional long-only commodity exposure can evaluate the effectiveness of this empirically substantiated approach. Utilising our proprietary trend-following signals, we determine whether the BCOM Index exhibits an upward or downward trend. Based on these signals, we establish a long position in the index when trend indicators are positive and liquidate positions when they are not. Figure 5 illustrates that this trend-activated version significantly outperforms its respective benchmark, suggesting that trend-timing commodities effectively mitigates the asset class's negative excess returns. In essence, it allows portfolios to benefit from commodities as inflation hedges while limiting negative carry during non-inflationary periods and liberating the risk budget for alternative asset classes.

Simply put, when confronting challenging market episodes, incremental improvements informed by continuous research can enable strategies to enhance their response to recognised uncertainties.