Gold is no longer a must-have option; FOF diversified allocation embarks on a path of seeking change

Author: Wei Zhaoyu

“For now, I won’t participate in gold investing anymore, unless the volatility of this kind of asset returns to normal.” A FOF fund manager from a public offering institution recently told a reporter from China Securities Journal. In the short term, the role of gold in diversified asset allocation appears to have changed. “Since the gold price has been moving up and down in step with equity markets across multiple trading days, we’ve started to think about the significance of allocating for its downside-hedging attributes.”

In the traditional diversified asset allocation framework, gold has long been regarded as the “stabilizer” that helps withstand volatility and balance risk. However, once its price action began to resonate at the same frequency as equity markets, gold’s downside-hedging halo has faced serious challenges. This is not just a short-term aberration in one asset; it also reflects that the allocation strategy that many FOF fund managers have treated as a rule of thumb—using combinations such as “gold + Nasdaq + dividends” to ride through the cycle—is now being shaken. When the old “stabilizer” temporarily fails to work, professional investors have no choice but to think deeply: in a complex market environment, does the true resilience of diversified allocation come from reliance on historical paths, or from continuous assessments of macro changes and dynamic rebalancing among assets?

**　　From a hedging instrument to a risk asset**

In recent months, ongoing geopolitical crises have continued to intensify. Gold holders have not enjoyed the benefits of a safe-haven asset; instead, they have received an “experience pass” that moves up and down alongside equity assets. According to Wind data, taking a certain gold ETF as an example, the fund’s declines across multiple trading days in late March were significant. Its single-day drop on March 23 exceeded 9.5%, far higher than the single-day declines of equity indexes such as the CSI 300. As the geopolitical situation fell into a stalemate, even though gold prices rebounded slightly in the recent period, they never managed to recover the territory they had lost earlier.

Bridgewater also released a research report recently stating that although gold is often called a store-of-wealth tool, when safe-haven sentiment in the market heats up or various geopolitical crises occur, gold does not always provide stable protection.

Zhang Yun, head of FOF investments at Everbright Prudential Fund, said that the gold market has undergone tremendous changes recently. While the return of rate-cut expectations by the Federal Reserve could have negative effects on gold prices, the market saw multiple large-scale selloffs within the first quarter. This shows that asset crowding is high and there are problems on the liquidity front, causing the original safe-haven attributes to fail.

“Something similar happened when the second oil crisis in November 1978 overlapped with heightened expectations for monetary policy tightening. At that time, gold also saw concentrated selloffs because it had accumulated a large amount of profit-taking positions in the prior two years.” When discussing the current gold market, Zhang Yun believes gold is currently in a slow repair phase. After large-scale selloffs, the positioning of holdings has cleared to a certain extent, but risk-and-return characteristics such as volatility and the Sharpe ratio have completely differed from those of the past two years. It still requires some time and catalysts to re-enter an upward channel.

Worth noting is that, from the perspective of diversified asset allocation, because gold has historically had weak correlation with equity assets, gold-themed funds have long been the “favorite” of FOF fund managers. In terms of the number of top holdings, according to Wind data, at the end of 2024, the Hu’an Gold ETF became the fund with the largest number of FOF holdings, with 55 FOF funds holding the Hu’an Gold ETF among their positions. In the first, second, and third quarters of 2025, the Hu’an Gold ETF kept “owning the top spot,” becoming the fund with the largest number of FOF holdings. Only by the end of 2025 did that throne give way to the Haitong Prosperity CSI Short-Term Financing ETF. However, the number of times the Hu’an Gold ETF is held as a top holding by FOFs remains high, still ranking second.

Many FOF fund managers have also gone “heavy” on allocating to gold assets. As an example, at the end of 2025, taking Haitong Juyou Select as a case in point, the fund purchased five gold-themed ETFs, including the Industrial and Commercial Bank of China Gold ETF. Another example: Guotai Jun’an Min’an Pensions 2040, at the end of 2025, had heavy positions in three gold stock ETFs and one active equity fund focused on gold, silver, and jewelry; these four funds accounted for more than 30% of the FOF fund’s net asset value.

**　　The role of diversified allocation may be changing**

In the short term, gold’s role in diversified asset allocation seems to need to be re-examined. In Zhang Yun’s view, the core reason diversified multi-asset allocation investors allocate to gold originally is to provide stocks with diversified return sources that have low correlation and some defensive qualities. When gold’s actual performance no longer aligns with its original functional positioning, she believes it is still necessary to reassess its asset role, although she continues to look favorably on its allocation value in the medium and long term. “In traditional diversified asset allocation, gold is assigned the roles of ‘low correlation’ and ‘hedging asset.’ But recently, its correlation with risk assets (such as U.S. stocks) has clearly increased. In hedging scenarios, instead of stabilizing alongside other assets, it resonates on the downside and even falls by a larger magnitude than stocks. In the short term, it has lost its defensive function.”

“If gold’s hedging attributes fail and volatility shows extreme abnormal behavior, it should no longer be passively held as a portfolio ‘stabilizer.’ In that case, allocations should be actively adjusted to find other assets with low correlation for replacement, and investment discipline must be strictly enforced.” A FOF fund manager from a Beijing-based public offering firm revealed that by the end of March, they had cleared the vast majority of their positions in gold-themed funds.

What other categories of assets can play a role with low correlation to equity assets? Zhang Yun said that assets such as soybean meal currently do not have high market attention, but agricultural assets with relatively good positioning and fundable structure are worth watching.

He Ze, FOF investment director at HSBC JinXin Fund, said that from the perspective of diversified asset allocation, the team’s ranking of gold remains relatively high. It’s just that the likelihood of hitting new highs in the short term is not great. Going forward, they will continue to monitor gold’s trading crowding and the degree of price pullback to determine the timing to buy. “Currently, gold’s implied volatility is still at a fairly high level. The cost-effectiveness of investing in gold is likely to decline over the next period. In the short term, downside risks may be higher than upside risks.”

From the perspective of investment advisors, there seem to be more options for short-term replacement strategies for gold. Speaking about recent actions related to gold, the Yinqi Oriental Gold Craftsman investment advisory team said that in practical operations, what they do is mostly tactical adjustments rather than structural changes to the overall allocation framework. This is mainly based on its strong gains earlier and the team’s expectations that gold price volatility will rise in the future. At the same time, the team has increased allocations to absolute return strategies, such as CTA strategies and multi-strategy FOF products. These strategies have stronger adaptability under different market environments, and they can also deliver more stable performance during stages when uncertainty is high.

**　　Existing allocation strategies may face challenges**

In fact, the phenomenon of crowded gold trading has been discussed by the market for a long time, and the strengthening short-term correlation between gold and equity assets has also drawn the attention of many investors. Although last year the gold price still maintained an overall upward trend through several bouts of sharp volatility and did not trigger much skepticism, this situation has now become explicit and is worth investors’ vigilance.

In reality, it’s not only gold. Many FOF fund managers’ allocation strategies have long been facing challenges. Some in the industry point out that for a relatively long period, the combination “gold + Nasdaq + dividends” has been seen by many fund managers as the “sure-win general” for diversified FOF allocation, believed to continuously provide stable returns and, over the long term, hard to underperform the market. However, the stability of the excess returns generated by this strategy is being broken.

“After this crisis, diversified asset allocation should sound an alarm. In 2026, risk control will need even more attention—especially the tail risk of fat tails driven by the phased rise in the U.S. dollar and U.S. Treasury yields, an increased expectation of tighter liquidity, and synchronized downside moves across multiple assets. Assets that have previously shown high Sharpe ratios, including gold and U.S. stocks, are unlikely to continue to maintain past levels this year, so we cannot over-rely on historical data.” Zhang Yun said.

China Securities Journal learned that as black swan events occur more frequently and more professional investors are thinking more deeply about how to further optimize the robustness of diversified asset allocation. Some views suggest that by making flexible adjustments through industry rotation and style rotation, and continuously deepening assessments of the macro environment, it will be possible to expand more diversified sources of returns and improve a portfolio’s ability to adapt.

(Editor: Xu Nannan)

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