25% In One Alternative? No
AQR offers model portfolios comprised of its mutual funds and there are some interesting ideas to study. Of most interest is the Moderate Aggressive portfolio which allocates as follows; 34% to large cap US equity, 5% small cap US equity, 22% international equity, 8% emerging market equity, 25% alternatives, 5% commodities and 2% cash. I am aware that adds up to 101% but I don't know why. So the model targets just under 70% to equities one way or another.
The alternatives sleeve is most interesting. As you can see this model doesn't include traditional fixed income, for that matter neither does the Aggressive model. The other models which are more conservative to varying degrees do have fixed income exposure and all five of the models have the same 25% allocation to alternatives. The alternatives allocation is invested in the AQR Alternative Risk Premia Fund. There are multiple symbols, I used QRPNX in writing this post.
AQR has a robust alternatives business with what appears to be good long term success, more notably with its risk parity strategy, but has struggled recently and that is reflected in this chart of QRPNX which goes back to its inception.
QRPNX seeks a market neutral result using multiple strategies across four asset classes. In looking at the website and going through some other hoops, there are more than 1300 holdings (long and short combined) including equities, bond futures and currencies. It would take a long time to have a shot at sorting out what the fund is currently trying to do closer to the ground than its macro objective of market neutral.
Whatever QRPNX is, what it isn't is plain vanilla exposure to an asset class and in that context, putting 25% into any fund that is this complicated, that is anti-plain vanilla makes no sense to me. This sentiment is not about its past performance as any valid and sophisticated strategy will have periods where it does well and others that it struggles. Two years of struggling is certainly disheartening for holders I suppose the first two years could have just as easily been good for the fund. That's the thing, any strategy can have a long stretch where it does poorly or otherwise disappoints.
I have pretty much always been a believer in using alternative strategies going back before the term liquid alts was common. If the idea is that it should have a low to negative correlation to equities, which so far has been the case even if unintended, and equities have the tendency to go up the majority of the time, even when they "shouldn't," then it is suboptimal to allocate so much to this idea. Same as gold, I believe in a small allocation to gold because of its tendency to a low/negative correlation but at some portfolio weight it goes from being a diversifier to an insurmountable drag on results. Quantifying that fulcrum point is subject to debate but I would argue 25% is well past it.
I've made similar arguments in the past to 25% in any sort of niche or alternative. Before the crisis, there were plenty of pundits making the case for 25% in REITs, others suggesting 25% to MLPs as well as commodities. This never made sense to me and still doesn't. Those are all valid niches but nothing will always be best or work as hoped for all of the time. REITs were some sort of panacea until the financial crisis when the iShares US Real Estate ETF (IYR) fell 70%. MLPs were believed to be immune to changes in the price of oil. In the last five years it has been cut in half and can't seem to get off the mat. Commodities were adored during the 2000's, probably because they did well and brokerage account compatible trading vehicles were issued but in the last five years iPath Bloomberg Commodity Index Total Return ETN (DJP) is down 37% in the last five years and 42% in the last ten years.
It's a completely different magnitude of consequence getting a 25% allocation wrong versus a 3% allocation. Generally I never want anywhere close to 25% in niche alternatives but if you think that much is appropriate, use different and unrelated strategies in small doses so that a never should have happened blowup doesn't cause undue damage on your portfolio.