Embracing alternatives in a supply-driven world

For much of the past few decades, investors have operated in a world where demand-driven forces dominated economic cycles. But that world is shifting.

Today, supply-side dynamics exert far greater influence on growth, inflation and markets than many investors fully appreciate. Tariffs, reshoring, immigration policy, energy transitions and rapid AI deployment are reshaping the global economy. These forces don’t just move prices; they expand the range of potential macro outcomes. This makes it harder to rely on traditional diversification strategies rooted in stable correlations and predictable demand cycles.

Negative supply shocks – whether from trade barriers, energy disruptions or labor shortages – can push inflation higher even as growth slows, limiting central banks’ ability to respond. Consequently, both stocks and bonds can decline together, as seen in 2022, or bonds may simply offer less protection than they would in a pure demand shock. This stands in contrast to the negative demand shocks we have become used to, which allow central banks to lower rates, supporting bonds as stocks fall and providing natural diversification.

On the flipside, positive supply shocks – such as those driven by productivity gains from AI or regulatory reform – can boost growth and lower inflation.

Yet capturing the benefits of this will depend on how portfolios are positioned. History shows that in major capital expenditure (capex) cycles like railroads or telecom, early perceived winners were not always the ultimate beneficiaries. Today, the companies most dominant in public indexes (as well as some large private firms) are also those committing the largest capital outlays. We believe investors should take a thoughtful, diversified approach to gaining exposure to productivity gains.

Historic supply shifts are generating a much wider range of inflation, growth and market outcomes than in the pre-COVID cycle. In short, portfolios need to adapt.

Predicting how shifts in supply will impact economies and markets is difficult. The inherent estimation error – where small deviations in inputs can lead to vastly different and often unstable portfolios – can be amplified in a supply-driven world. Historical correlations, particularly the diversifying relationship between stocks and bonds, can become unreliable when supply shocks occur.

A more robust approach to building portfolios (one that can withstand a wider range of unknown future states) is needed.

Rather than relying on a single forecast, investors should prepare for a range of scenarios. In negative supply shocks, assets with explicit inflation pass-through and liquid macro strategies can help defend real value and add diversification. And in positive supply shifts, assets tied to infrastructure or data connectivity and private companies implementing process improvements can stand to benefit.

Alternatives can play a vital role in the middle ground, diversifying exposures beyond lofty public equity valuations and core bond yields.

Embracing such uncertainty is a wise second step toward constructing more robust and resilient portfolios. This approach shifts the focus from ’assets I want to own’ to ’exposures I want to have,’ deconstructing assets into their underlying risk factors and economic attributes.

Applying this perspective changes how we view assets within a portfolio. For example, infrastructure moves from simply being an alternatives allocation to representing inflation-linked cash flow exposure.

Building allocations and portfolios in this way – often referred to as a ’total portfolio approach’ – offers a clearer picture of actual return drivers and potential resilience to economic shocks. It provides a more precise and holistic view, revealing unintended risk concentrations and highlighting diversification gaps that traditional asset class labels may obscure.

Allocations should be sized according to objectives, risk tolerance and liquidity needs. Adding sleeves that have cash flows and risk drivers aligned with a supply-uncertain world, can better cushion portfolios against inflationary shocks, participate in productivity-led gains and access assets not captured by public markets.

Let’s look at the underlying characteristics of each alternative asset class in turn.

Infrastructure assets often have consumer price index (CPI) linked or regulated revenue formulas, helping preserve real cash flows when inflation rises due to supply shocks.

During the 2021–2022 inflation spike, many regulated utilities and toll roads maintained or increased distributions.

At the same time, infrastructure is the place where AI-era buildout becomes tangible: transmission lines, substations, flexible generation, storage and interconnectors are the pipes and wires that enable digital scalability and electrification.

Indeed, investors concerned about the return on investment (ROI) of hyperscaler capex can still benefit from the AI buildout without necessarily worrying about how the grid upgrade is ultimately used especially since these upgrades were long overdue even before the current AI growth.

Infrastructure therefore speaks to all three roles: cushioning inflation shocks, benefiting from capacity expansion and accessing assets largely outside public indices.

Real estate is not a monolith. The way inflation shows up depends on lease structure. Shorter duration leases – hospitality, self-storage and many residential formats – reset rents faster and can keep income closer to the price level.

Some ground leases and specialty properties include explicit CPI escalators.

On the supply expansion side, the most visible theme is data center real estate, where proximity to power and interconnections has become a hard constraint; logistics near reshored manufacturing corridors is another. These are local, specialized assets that broaden the investable universe and connect directly to the supply map of the economy.

Private credit has grown because it solves practical problems for borrowers – speed, structure and flexibility (especially when banks are cautious or timelines are tight). In a world of supply chain realignment and operational upgrades, that flexibility backs capex, acquisitions and refinancing tied to productive investment. Many loans are floating-rate, so coupons adjust when inflation stays firm, providing a degree of income ballast. The category also expands the opportunity set by opening up cashflow streams that rarely appear in public markets.

If AI and process innovation are going to lift productivity meaningfully, much of the early value creation will happen at private companies. Sponsors don’t just fund; they help install new processes, software, automation and pricing discipline. Indeed, private equity aims to capture returns that appear before or differently from public markets. It is a direct play on the benefit role and, secondarily, a way to broaden exposure to the economy’s evolving ’picks and shovels.’

In supply-driven markets, rates, commodities and currencies – the assets where macro strategies live – tend to be volatile.

When tariffs shift trade flows, or when labor or energy constraints alter inflation expectations, those changes cascade into yield curves, commodity term structures and exchange rates.

Strategies that can go long or short across these markets can help restore diversification when stocks and bonds move together. They are also an avenue to expand the opportunity set, tapping return sources not tied to equity or credit beta.

For decades, markets were driven mainly by demand. Supply was relatively stable due to globalization, cheap labor and abundant energy. Now, markets have changed. Supply-side pressures are back, and in persistent and unpredictable ways. But seeking protection for portfolios is still possible. Allocations to alternatives can build resilience and balance in portfolios.

In a world of heightened uncertainty and ’fat tail’ risks, a robust portfolio is often preferable for its anti-fragile properties, even if it sacrifices headline risk-adjusted returns. Within such a portfolio, sourcing specific targeted outcomes – such as inflation sensitivity and factor exposures – elevates alternatives from a peripheral role to an essential core component, in many cases delivering what public markets cannot reliably provide.

Traditionally positioned as satellites to public assets, alternatives were merely seen to provide additional diversification and alpha. While these benefits are still valuable, a modern, characteristics-based approach to portfolio construction recognizes that the goal is not a single ’optimal’ portfolio. Instead, allocations to alternative assets can be part of constructing a more robust portfolio; one that is designed to perform reasonably well across a wide range of economic environments and withstand shocks, rather than perform only in a ’goldilocks’ scenario.

Now, the gap between winners and losers is widening. Companies, sectors and even countries that can adapt to supply constraints and capitalize on new opportunities will likely pull ahead. Others risk falling behind. This heightened dispersion creates fertile ground for alternatives, amplifying their role in the portfolio as both a defensive shield and a strategic engine for capturing upside.