Challenging the investment maze with efficiency, convexity and conviction

I imagined a labyrinth of labyrinths, a maze of mazes, a twisting, turning, ever-widening labyrinth

          Jorge Luis Borges, “The Garden of Forking Paths”

From Socrates to Heisenberg, humans have confronted the essentially unstable, uncertain and complex nature of the universe for thousands of years. Change is nothing new: but in moments of transformation, the maze of possibilities can be paralysing.

In 2025, the global order established over 70 years was deliberately upended. Power-based geopolitics is now strong-arming diplomacy, protectionism has distorted open markets and trading alliances are being undermined for short-term self-interest. Investors were forced to adapt rapidly as tariff wars and geopolitical conflicts disrupted supply chains and incited market turbulence.

One year on, it is clear that this is the new world disorder that investors must navigate. It will test portfolio resilience: not the ability to withstand a shock until it passes, but to find a way forward through the maze – however complex, unfamiliar and deceptive it is. 

To succeed, we believe investors need to a range of capabilities. From efficient core exposures complemented by solutions offering uncorrelated alpha potential, to embedded convexity and a clear understanding in the structural forces shaping the economy.

So armed, they can challenge the maze.

Read also: Investing for a new reality: how geopolitical change is reshaping capital flows

1. Efficiency at the core of strategic allocations

In 2026, asset flows have continued to show investors’ overall preference for passive exposures in major asset classes. In H1, global ex-US investors channelled EUR 269 billion into passive equity, fixed income and multi asset products and EUR 168 bn into competing active strategies¹. Passive exposures can certainly help implement strategic allocations in a cost-effective way. However, we believe the efficiency, risk control and performance potential of these allocations can be improved through systematic processes that harness research, technology and active investment skill. In addition to capturing market exposure, further benefits – such as better liquidity or portfolio decarbonisation – can be embedded.

Decarbonising core global equities and fixed income

From intensifying wildfire seasons in Europe and North America, to record-low water levels in the Rhine and a sharp increase in subsidence claims as clay soils underneath London properties dry out, the physical consequences of global heating are strongly evident. Although geopolitics and AI are the current headline issues, the need for greater decarbonisation and adaptation has not diminished – and presents both risks and opportunities for investors that can be factored into core allocations, in our view.

By analysing emission trajectories, we identify companies – even in carbon-intensive industries – that are on credible paths to achieve net zero by 2050. This enables us to build highly diversified portfolios designed to capture market performance while matching risk and decarbonisation targets set by investors. In equity and fixed income, our approach has outperformed over the five years since launch while effectively mitigating climate risk^2.

High-yield credit without liquidity and cost issues

High-yield (HY) corporate bonds offer attractive long-term return and income potential. However, traditional approaches – both active and passive – face structural drawbacks: liquidity is limited, performance often lags benchmarks and costs (including swing pricing during drawdowns) are high in periods of stress, as many investors rush for the exit.

These challenges can be addressed by accessing the credit premium through derivatives and avoiding physical HY bonds altogether. Through a combination of holding liquid, high-quality government debt and selling credit default swap (CDS) index options, investors can replicate HY bond cashflows, delivering potential outperformance while avoiding the liquidity constraints of physical markets. Costs are also more attractive, with significantly lower bid-ask spreads than bonds, supporting a total expense ratio (TER) well below the 0.7%-plus median for global HY funds.

Deep research enabled us to develop this solution. In our view, it is a better way to achieve market exposure to HY credit without the penalties incurred on cash bonds – especially in periods of turbulence.

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TargetNetZero Equities

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Liquid Global High Yield

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2. Private markets for uncorrelated alpha potential

Efficiency, cost and risk-control matter in core allocations. For alpha-seeking satellite strategies complementing these market exposures, the required characteristics are differentiated skills to express convictions and low correlations to beta. Private markets are attractive arenas for these solutions.

The rise of secondaries

In the private equity (PE) market, the secondaries space has generally outperformed other disciplines, with a more attractive risk-return balance and lower loss ratios (see Figures 1 and 2). This track record is built on strong asset quality and liquidity demand, and has underpinned significant market growth in recent years.

Transaction types have diversified from slices of Limited Partner (LP) portfolios to single- and multi-asset continuation vehicles, in which General Partners (GPs) offer existing investors opportunities to realise liquidity from high-performing portfolio companies and new investors the chance to buy in. These GP-led transactions form the fastest-growing part of the market.

Highly astute secondaries investors can also seek direct, or ‘company-led’, deals, in which founders or early investors in firms aim to divest part or all of their stakes. These non-intermediated transactions require GPs to have deep sector knowledge and sourcing connections, along with underwriting and deal-structuring expertise – and in this complexity lie attractive alpha-generating opportunities.

FIG 1. Secondaries have outperformed many private-market segments…³

FIG 2.  …with an attractive risk-return profile and low loss ratio⁴

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Lombard Odier Secondaries

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Asset Backed Loan

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Continued institutional allocations and the opening up of private assets to retail investors has enabled some GPs to raise significant amounts and compete for large, strongly-contested deals. In contrast, the fragmented and less-efficiently priced mid-market offers opportunities to access attractive assets away from this intense competition and at discounted prices, in our view. Those with strong sourcing, due diligence and execution skills can be highly selective. Focusing on the mid-market, our team recently invested in leading consumer-to-consumer digital second-hand marketplace Vinted, via a direct secondaries transaction.

With a broader range of transaction types, strong deal volumes and increasing investor participation, we believe the secondary market is no longer only an emergency liquidity-release valve when M&A and IPO activity is subdued. For PE firms, it has become an exit route in its own right. For investors, its viability as a strategic private markets allocation is only increasing.

Read also: Private equity secondaries: growth drivers, transaction types and a differentiated approach

Within private credit, the asset-backed loan (ABL) market offers an attractive blend of yield, protection and diversification that differentiates it from direct lending, in our view. The fundamental distinction is that ABL sources returns from loans that are secured by assets which are already cash-generative. In contrast, returns from direct lending are based on the future growth of underlying businesses. In addition to providing greater certainty, ABL offers beneficial characteristics relating to duration, seniority and diversification (see Figure 3).

FIG 3. Some of the key distinctions between asset-backed loan and direct lending strategies⁵

The assets securing ABL deals range from receivables and inventory to real estate, media royalties and legal claims. Many of these assets, such as media royalties, are unaffected by the business cycle, making their performance less correlated to market and economic conditions, in our view.

3. Embedded convexity to absorb shocks and boost resilience

Extreme market scenarios can challenge even the most astute core-satellite approaches. This makes convexity – the ability to generate upside potential throughout market cycles, especially during drawdowns – a useful portfolio tool. It can be achieved through various approaches, such as purpose-built multi-asset and alternative credit strategies.

Our experience in managing specialist hedge-fund strategies teaches us that convexity-seeking investors should consider three factors:

Convexity positions are best established before crises strike, in benign or bullish environments. At the time of writing, credit markets had been in a prolonged risk-on state of tight spreads across US investment-grade and HY markets. In our view, even a partial widening would enable dedicated convexity positions in these sectors to respond positively.

This is precisely the kind of environment in which we aim to embed convexity. One straightforward approach is to establish long puts on high-quality, very liquid credit instruments that can pay off in periods of stress – when liquidity is at a premium – without any long-term cost or ‘carry bleed’.

Convexity positions are best established before crises strike, in benign or bullish environments

Some asset classes – like convertible bonds, where fixed-income instruments have an embedded option to change into equities of the issuer – are inherently convex. Historically, convertible bonds have captured 50% of the upside in equities with 30% of the volatility⁶. This is due to the combination of the equity option – whose optionality provides access to equity upside without full exposure to market risk – with the bond coupon and expectation of future principal repayment providing downside protection should the equity option not be exercised.

Market uncertainty drives performance for convertibles – the greater the volatility, the more valuable the equity option. During the early stages of the US-Iran war, our global strategy incurred 54% of the equity sell-off but 100% of the rebound – effectively limiting the downside and participating fully in the upside (see Figure 4).

FIG 4. Our convertible bond strategy showed resilience in the opening stages of the US-Iran war⁷

4. Conviction in the current economic transition

Throughout history, system changes have driven economic transformation and growth. In the energy system, for instance, the primary fuel powering business and society has changed from wood to coal, then oil and gas – and now solar and wind are set to become dominant sources, reinforced by battery storage. The availability and cost of energy will always be fundamental to commercial activity, enabling growth and innovation. The same principle applies to other systems, like materials, and the health and financial platforms underpinning social stability.

Fundamental pressure points facing the world – the impacts of climate change, nature loss and social instability – are giving rise to new economic solutions. In many cases, these are being accelerated by advanced technologies, including AI and materials science. The result is a transition to an economy that can deliver lower costs, higher productivity, greater resilience and improved outcomes.

Fundamental pressure points facing the world – the impacts of climate change, nature loss and social instability – are giving rise to new economic solutions

Electrification, for instance, is a clear growth driver. Our conviction, based on rapidly falling renewables and battery costs, is that electrification will drive a structural replacement of the fossil-fuels system. While significant electrification of heavy industry and transport remains to be achieved, solar, wind, energy storage and electric vehicles (EVs) have now passed tipping points for mass adoption. The price of solar panels has fallen 90% since 2010⁸, removing bottlenecks to clean-energy generation. Once the challenge of efficiently combining this and other renewables sources with energy storage and demand-response systems is met, the economy can start to realise the potential for abundant, affordable and resilient electricity supply.

We estimate that global capital expenditure on the energy transition in this decade alone is on course to reach USD 24.5 trillion cumulatively, potentially financing a level of disruption rivalling the technological revolution that began in the 1990s (see Figure 5). But investors must be prudent and analyse the profit margins, competitive moats and valuations of companies across the electro-economy. The objective is to identify mispriced companies in various industries – from grids and converters to battery manufacturers – with the strongest prospects of generating attractive, durable returns. 

The energy transition also creates opportunities in the materials system, as a range of commodities are essential to the build-out of new energy technologies. In the long term, this shift will unlock higher productivity, lower operating costs and better efficiency, but in the near term it will be highly capital-intensive, underpinning demand for transition materials like copper, zinc, lithium and cobalt.

FIG 5. Power grids, electrification and renewable energy projects require significant capex⁹

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Transition Materials

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Planetary Transition

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The high upfront cost of EVs, renewable energy projects and battery storage is strongly driven by the volumes of raw materials required. For example, a typical EV needs about 6 kg of lithium, 29 kg of nickel, 10 kg of manganese and 8 kg of cobalt, while charging stations require a consequential amount of copper.¹⁰ Meanwhile, photovoltaic (solar) panels use large quantities of copper, silicon, silver and zinc, and the production of wind turbines requires iron ore, copper and aluminium.

In our view, increasing demand and structural undersupply will drive the prices of transition commodities higher in the coming years. In the current environment, stockpiling imperatives for nations and companies amid heightened geopolitical risk and the build-out of AI infrastructure add further upward pressure on prices. These are among the key convictions for our commodities team, which since 2023 has focused on transition materials.

To challenge and not surrender

In his 1962 essay “The Challenge to the Labyrinth”, writer Italo Calvino reflected on the shifts driving post-war Europe, comparing rapidly industrialising society to a bewildering maze. Since then, the world has only become more complex. Yet Calvino’s conviction in drawing on our sharpest cognitive tools to challenge – and not surrender to – today’s perplexities is more apposite than ever.

Investors must confront their new reality, and be ready to reevaluate, reposition, and rethink approaches when needed. To succeed will require astute investment knowledge, skilful implementation and a range of capabilities to manage blind corners, diversions and dead ends. To find the opportunities beyond, investors must challenge the maze.