As discussed in our 2026 Outlook, we expected the US dollar to stage a rebound at some point this year due to oversold conditions and its historical tendency to strengthen during risk-off episodes. While conflict with Iran was not the catalyst we anticipated, the recent move is consistent with that view. Even after appreciating roughly 4% since the conflict began, the dollar’s rally still appears modest rather than overextended. If hostilities intensify further and oil prices continue to rise, the near-term bias for the US dollar may remain to the upside, particularly given the United States’ position as a net oil exporter and the dollar’s longstanding role as a defensive asset during periods of market stress.

That said, we do not view the current oil shock as the start of a lasting regime shift for currencies. Higher oil prices should weigh on the currencies of net oil-importing economies through a negative terms-of-trade shock, but our base case is that this pressure proves temporary rather than permanent. Even if the conflict persists, a sustained closure of the Strait of Hormuz appears unlikely, as the economic costs would rise quickly for all parties and intensify pressure to restore safe passage. Recent US messaging, including President Donald Trump’s acknowledgment on Monday that peace talks with Iran are underway, reinforces our view that the United States does not want a prolonged conflict. In our assessment, that reluctance reflects not only geopolitical and economic considerations, but also the domestic political costs associated with higher oil prices and a prolonged foreign conflict ahead of the November US congressional elections.

If the conflict were to broaden into a more prolonged energy crisis, the dollar could also become a victim of its own success. A sufficiently large oil shock would eventually undermine global growth, weaken aggregate demand, and help bring energy prices back down, particularly if even modest additional supply also comes online. A much stronger dollar in a recessionary backdrop would likewise tighten financial conditions and increase pressure on the Federal Reserve to cut rates more aggressively or reintroduce balance-sheet support. History suggests that once the Fed shifts decisively toward easing in response to growth stress, earlier USD strength can give way to renewed weakness, as seen in 2001, 2008, and, to a lesser extent, 2020.

Stepping back, the more lasting consequence of the current crisis may be a further strengthening of policy priorities in many countries around energy security, grid resilience, renewables, nuclear power, and defense spending. These investment needs were already becoming more apparent and have been reinforced by electrification trends and the global artificial intelligence (AI) data center buildout, both of which are increasing demand for generation, transmission, and power equipment. While the United States has been the main beneficiary of AI- and semiconductor-related capital spending to date, a broader capex cycle centered on grids, power systems, energy security, and defense is likely to be more geographically dispersed and could provide greater support to non-US markets, which generally have deeper exposure to industrials, utilities, and related cyclicals. The conflict may also reinforce concerns among some non-US investors about the prudence of maintaining large exposures to US assets, potentially reducing the marginal flow of foreign capital into US markets relative to recent years.

Taken together, these dynamics reinforce our broader view that the US dollar remains vulnerable over the next few years, even if it strengthens further in the near term. The dollar remains overvalued in our view and continues to be supported by concentrated flows into US equities, particularly large-cap technology stocks. If market leadership broadens from US tech toward cyclicals and non-US equities, downside risks to the dollar could become more pronounced. Rather than chasing short-term USD strength, we think investors are better served by focusing on diversification and using periods of dollar appreciation as opportunities to initiate or add to USD underweights across portfolios.

The post Does the Iran War Change Our View on the US Dollar? appeared first on Cambridge Associates.

The election results represent a resounding win for Takaichi, with the LDP alone winning a two-thirds supermajority in the Lower House. Together with their coalition partner, the Japan Innovation Party (JIP), Takaichi now effectively controls 76% of Lower House seats. While the LDP does not have a majority in both houses, the Lower House supermajority enables the LDP/JIP coalition to override any opposition from the Upper House.

Takaichi secured the election by pledging decisive leadership and a vision for a more self-sufficient and assertive Japan, while also addressing the country’s cost of living crisis. Opinion polls consistently indicate that inflation is the most pressing concern among voters. With the electoral mandate, Takaichi will be able to press ahead with planned reductions in consumption taxes, expand household subsidies, and implement strategic investments and reforms in sectors such as semiconductors, shipbuilding, and AI. Additionally, increased defense spending looks likely. All in all, fiscal spending may increase by 2%–3% of GDP.

While fiscal stimulus may boost near-term growth, which has helped Japanese equities outperform global equities by 6 percentage points this year, increased government spending comes with its own risks. Notably, Japanese bond and currency markets were initially spooked in mid-January following the announcement of the snap election, reflecting concerns about debt burdens, political pressure on the Bank of Japan (BOJ), and the prospect of higher inflation.

Fiscal crisis concerns, while relevant, are overblown. Japan’s debt-to-GDP ratio has been declining in recent years, and interest expense as a percentage of GDP is lower than in other developed countries. Additionally, foreign ownership of JGBs is relatively low, reducing the likelihood of a sudden fiscal crisis or a “Liz Truss moment” similar to what the United Kingdom experienced in 2022. The recent rise in Japanese bond yields has been driven by rising inflation in Japan and reduced bond purchases by the BOJ, which has sought to shrink its balance sheet. With core inflation running close to 3%, real interest rates in Japan are still low, which is partly why the yen remains under pressure.

Tackling cost of living concerns ultimately requires a stronger yen, as a weak yen is partly to blame for inflation pressures. The Japanese government has made it clear that it will intervene if the USD/JPY exchange rate approaches the 160 level. But such a level will be hard to defend in the absence of higher interest rates. Given the election all but guarantees increased fiscal stimulus, the BOJ will need to continue hiking rates, otherwise, it risks a further rise in inflation.

Continued BOJ rate hikes, combined with modest rate cuts by the Federal Reserve, would further narrow the yield gap between Japan and the United States, providing support for the yen. Additionally, higher government bond yields in Japan could prompt the repatriation of some Japanese overseas bond holdings, exerting further upward pressure on the yen.

Overall, we see the election outcome as positive for the Japanese economy and, by extension, the yen. To capitalize on this outlook, we favor strategies that are less sensitive to JPY appreciation. Specifically, we like Japanese small-cap equities, which are a significant component of our current tactical recommendation to overweight developed markets small caps, as well as private equity buyouts and activist strategies. These strategies are well-positioned to benefit from stronger domestic growth and the ongoing momentum in corporate governance reforms and merger & acquisition activity within Japan’s market.

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by Kevin Rosenbaum

Many investors have seen the share of their portfolios invested in equities—both public and private—increase over the past decade. This shift was fueled partly by the maturation of private investment asset classes, the growth of passive investing, and low bond yields that accompanied extraordinary fiscal and monetary stimulus, all of which contributed to robust equity returns and reinforced higher allocations. However, the landscape has changed meaningfully in that time. Elevated valuations, increased market concentration, and mediocre macroeconomic conditions underpin our view that equity risks are heightened. For investors whose equity allocations are at elevated levels, 2026 presents a timely opportunity to reassess policy allocations and embrace greater diversification.

The upward shift in equity allocations is apparent across different investor types. For example, our analysis of a consistent group of 247 US endowments and foundations reveals that their average allocation to public and private equity increased from 51.7% in June 2015 to 64.8% in June 2025. This pattern is echoed among US households, who, according to the latest Fed data, held a record proportion of their financial assets in equities as of second quarter 2025. The magnitude of these changes suggests that many portfolios globally may now be less resilient to adverse market events.

This shift has occurred as the likelihood of such an event has increased. Valuation measures across equities signal caution in virtually any way you look at them, reflecting both years of strong performance and the recent surge of enthusiasm around AI. The excitement surrounding AI has also contributed to greater market concentration, with the ten largest US companies now representing 22.2% of total global equity exposure—one of the highest levels on record. At the same time, recent data trends suggest that labor markets may be more likely to weaken than strengthen in the coming months, a development that often serves as a key indicator of the global economy’s direction. Collectively, these factors point to elevated idiosyncratic and systemic risks compared to historical norms.

To be sure, the future is uncertain. That uncertainty is why we seek diversified exposure rather than allocating solely to the next best-performing investment. While we cannot predict the future, we can assess the factors likely to shape the range of potential outcomes. In today’s environment, these factors point to a distribution of expected equity returns with a lower median than typical and greater negative skewness. Still, the possibility of an equity rally remains within that distribution, despite heightened risks. For long-term investors able to withstand volatility, or those facing substantial tax implications from reducing equity exposure, maintaining current allocations may be appropriate. However, for investors sensitive to drawdowns—due to spending needs, risk tolerance, or other constraints—now may be an opportune time to reassess equity allocations if they are currently elevated.

Any shifts in policy allocations should reflect not only the outlook for equities, but also the relative attractiveness of other asset classes. Assessing these opportunities requires weighing how new exposures align with portfolio constraints, enhance diversification, and offer potential for manager value add—considerations that are often unique to each portfolio. One area that merits consideration in the current environment is hedge funds. They can provide differentiated sources of return and help reduce drawdown risks, particularly as many strategies are adept at navigating market inefficiencies and macroeconomic uncertainty. In addition to the potential for compelling returns, a thoughtfully constructed sleeve of hedge funds, or broader diversifying strategies, can also deliver substantial value add. We explore our hedge fund perspective, along with considerations across other asset classes, throughout the rest of this publication.

Once policy allocations are set, investors may also identify tactical opportunities that further diversify risks and support value add. By broadening diversification and thoughtfully adjusting policy allocations, investors can strengthen portfolio resilience and better navigate changing market environments. As risks shift, so should our thinking.

Investors should lean into AI thoughtfully in 2026

by Celia Dallas

Artificial intelligence is rapidly emerging as one of the most significant disruptive transformations to the technology ecosystem, with the potential to reshape business models, drive productivity, and address demographic headwinds. The sector’s promise is substantial, but the current investment environment is marked by exuberance, with capital flowing into AI infrastructure and applications at an unprecedented scale. Investors must balance optimism with caution, seeking exposure that is both strategic and disciplined.

The four largest hyperscalers (Alphabet, Amazon, Meta, and Microsoft) are projected to spend $350 billion in capital expenditures in 2025, with cumulative investment reaching trillions over the next five years. This capex boom echoes historical technology revolutions—railroads, telecom, dot-com—where transformative innovation led to overinvestment, excess capacity, and ultimately poor shareholder returns for the builders. Today’s AI leaders are shifting from asset-light, high-ROIC models to asset-heavy, capital-intensive businesses, a transition historically associated with deteriorating fundamentals and lower free cash flow.

Valuations for core AI infrastructure stocks are elevated, and the competitive arms race among Big Tech resembles a prisoner’s dilemma: firms feel compelled to overspend to avoid losing market leadership, even at the expense of collective profitability. The risk is that inflated multiples and massive capex may not be justified by future growth, echoing the dot-com bust. Asset lifecycles are shortening, with rapid depreciation of AI hardware requiring faster returns and exposing investors to higher risk if growth slows. Funding quality is shifting, with more reliance on private credit and securitized finance. Additionally, the ecosystem’s “circularity”—where companies are simultaneously customers, suppliers, and investors in one another—can mask underlying demand and profitability issues.

For now, most of the large public AI players have been living within their means, but operating cash flows are increasingly consumed by capex, share buybacks (in part to offset dilutive effects of share-based compensation), and acquisitions, all of which are strategic investments to remain competitive in this race to dominate the AI landscape. On average, capex accounts for 75% of cash flow from operations across these five companies, up from 45% in 2024.

Beyond the mega-cap tech firms, for companies broadly able to leverage the technology, AI is not just a source of top-line growth but also a powerful lever for cost reduction and margin expansion. Such opportunities are difficult to recognize at this stage of AI development, giving skilled managers with appropriate insights the potential to invest in such companies at relatively attractive valuations.

The buildout of AI physical infrastructure is creating new opportunities in power generation, grid modernization, and energy efficiency. As data centers and AI workloads drive up electricity demand, companies focused on improving access to power—whether through renewables, grid upgrades, or distributed energy solutions—stand to benefit. Even if AI promises are delivered more slowly than anticipated, such investments would still benefit from other electricity demand drivers like electrification of transportation and digitalization trends. These segments are essential to the sustainable scaling of AI and may provide more stable, diversified returns than the core technology providers.

Venture capital plays a critical role in the AI ecosystem, serving as the engine for innovation and disruption. Many of the most transformative companies of the internet era—such as Amazon and Uber—were venture-backed disruptors that redefined entire industries. Today, venture capital is fueling the next generation of AI innovators. These companies are often the source of breakthrough technologies and new business models that can reshape markets and create outsized value. However, the surge of interest in AI has led to a dramatic escalation in venture capital valuations requiring discipline to separate hype from legitimate opportunity.

AI’s investment frontier is rich with potential but fraught with complexity. The sector’s productivity and economic impact may take longer to materialize than current capex and valuations imply. Thoughtful AI exposure requires diversification beyond the largest AI-exposed names. Success will require partnering with skilled managers, maintaining price discipline, and staying adaptive as the landscape evolves. By eschewing hype, focusing on fundamentals, and diversifying exposure—especially toward asset-light early adopters, power and energy efficiency themes, and innovative venture-backed disruptors—investors can position themselves to outperform as the AI era unfolds.

Investors should invest across the electricity transmission food chain in 2026

by Simon Hallett

Much attention has been given to AI’s growing appetite for electricity and the resulting demands on grid capacity to support new, power-intensive data centers. However, AI is just the icing on the cake for an industry that, until now, was considered mature but is now poised for multi-year growth. Investors should prioritize cross-asset exposure to the expansion and modernization of electricity grids.

Grid operators need to build capacity and connect different locations at a pace not seen since the 1960s. This rapid expansion is straining supply chains for equipment and materials, leading to growing order backlogs and firm pricing for equipment manufacturers. At the same time, technological solutions are essential for operating smarter, more efficient grids that maximize existing capacity and seamlessly integrate multiple distributed and intermittent power sources.

Twin sustainability trends essential to a low-carbon transition are (1) the build out of renewables on global power grids, and (2) the expansion and redesign of grids to integrate this distributed power from new locations. This includes the addition of storage, load balancing, and “smart grid” technologies necessary to maintain stability with intermittent generation. These trends are deeply interconnected. As noted in a 2023 International Energy Agency (IEA) report, “Grids need to both operate in new ways and leverage the benefits of distributed resources, such as rooftop solar, and all sources of flexibility.”

The changing nature of electricity supply is a major driver of grid investment, but rising demand is reinforcing this need. After years of flat growth—when efficiency gains largely offset increased usage—global electricity demand is now accelerating as more activities, such as transportation (notably electric vehicles), heating, and industrial processes, become electrified. The most widely discussed theme is the AI-driven surge in data centers, which require not only more power but also new connections to the transmission system in previously unserved locations. While there is some risk that advances in technology and efficiency could eventually render certain data centers surplus to requirements, the growth in electricity demand extends well beyond AI alone.

Meanwhile, electricity grids worldwide have suffered from years of underinvestment. According to the IEA, while investment in renewables has doubled since 2010, capital expenditure on grids has remained largely flat. As a result, grid operators are now playing catch-up. Both the IEA and BloombergNEF estimate that grid capex must double by 2030, requiring an additional $300 billion in annual spending.

This is good news for a range of players. Utilities can expand their regulated asset bases at an unprecedented pace. Equipment makers and contractors are building order backlogs several years long, as are gas turbine makers. The situation for wind turbine makers is less clear, given political and regulatory changes have caused a swath of project cancellations, but growing demand outside the United States is underpinning recovery. For us, the clearest and most robust opportunity from electrification is in the grid itself rather than generation, considering the combination of historic underinvestment, new technologies and the need to “re-wire” many developed countries to cope with a completely different pattern of supply/demand.

Investors can access this opportunity through thematic strategies spanning a wide range of assets, from infrastructure to venture capital. Public equity managers focused on the energy transition may invest in large industrial companies supplying grid equipment, as well as the utility operators building out the grid. Similar opportunities exist in private markets, including private infrastructure funds and select buyout managers. Venture and growth equity managers with transition expertise are also active, targeting grid-enhancing technologies and unlocking the potential of demand response and energy storage through digitalization. One risk to note is the recent surge in public market valuations for some large industrial stocks tied to grid spending. Public market investors may benefit from waiting for a pullback or being highly selective.

The expansion and modernization of electricity grids is a broad theme with several distinct, independent drivers. It is not solely about AI or renewables; rather, it encompasses a range of factors shaping demand and investment. Additionally, the long timescales for infrastructure investments and equipment lead times suggest this will remain a multi-year opportunity.

Investors should underweight the US dollar in 2026

by Aaron Costello

After experiencing a decade-long bull run that started in 2011, the US dollar (USD) weakened sharply in 2025, falling by 10% at one point. We believe the US dollar has begun a multi-year bear market, but given recent oversold momentum, we expect the dollar will rally at some point in 2026. This is consistent with historical trends, whereby the US dollar tends to stage a rebound after experiencing declines of 10% or more. However, we do not think investors should try to market-time any USD rebound, due to the inherent uncertainty in the duration of any such rally and the fact that the US dollar remains overvalued, with ample scope to decline over the coming years. Instead, investors should underweight the US dollar relative to policy targets and use any rebound as an opportunity to initiate or add to USD underweights, with non-US equities and unhedged non-US sovereign bonds as two potential implementation options.

For 2026, the US dollar could strengthen if US economic growth remains resilient relative to elsewhere. Indeed, non-US economic growth faces headwinds in 2026 as the boost from tariff front-running fades. Relatively stronger economic momentum in the United States would also place less pressure on the Fed to cut rates, resulting in higher US rate differentials versus elsewhere and lending support to the US dollar, a dynamic that has already started to play out in late 2025. Conversely, the US dollar has historically rallied at some point during a US recession, albeit sometimes only briefly. While a recession is not our base case, the US dollar could still jump amid a growth scare in the United States triggered by further weakness in the US labor market spilling over into lower consumption and investment.

But investors should not chase any such rally. This is because we expect the dollar to remain in a downtrend over a multi-year horizon. The US dollar still faces headwinds from economic policy uncertainty, overvalued assets, and fiscal sustainability concerns, factors that dampen the attractiveness of US assets relative to elsewhere and therefore demand for the US dollar. The US dollar has benefited from equity-related portfolio inflows and given the growing froth in US equity markets, anything that shakes confidence in the AI theme could see reduced flows and a weakening US dollar. While the US dollar has benefited recently from a reduction in Fed rate cut expectations, this could change over the course of 2026 as a new Fed chair (and potentially two other Fed governors) will be appointed by the Trump administration. These upcoming appointments may bias the Fed toward more aggressive easing and narrowing of interest rate support for the US dollar. Regardless of who chairs the Fed, lower interest rates and a weaker US dollar are a stated goal of the Trump administration to help narrow the US trade deficit and spur a revival of US industry.

Overall, we expect the US dollar will weaken. Counter-trend rallies are common amid multi-year USD bear markets and despite the recent decline, the US dollar remains 32% overvalued in equity-weighted terms. Non-US equities and unhedged non-US sovereign bonds have typically outperformed during USD bear markets, especially when relative valuations are in their favor, making them effective potential options for implementing a dollar underweight. While we acknowledge the likelihood of a USD rally at some point in 2026, investors should remain underweight the US dollar because of the scope for continued USD weakness over a multi-year horizon.

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The evolving blockchain landscape

Since the first bitcoin block was mined more than 15 years ago, cryptoassets have grown from a niche experiment to a sector attracting major institutional capital (Figure 1). Early adoption was driven by technologists and crypto “libertarians” that sought financial sovereignty in a volatile, low-liquidity environment. Their efforts laid the groundwork for broader participation, which spurred the rise of exchanges, altcoins, and increased trading. Setbacks such as the Mt. Gox collapse—when the world’s largest bitcoin exchange lost hundreds of thousands of bitcoins to theft and mismanagement in 2014—exposed critical security gaps and prompted industry-wide improvements. Today, the sector’s maturation is evident in real-world applications like decentralized finance (DeFi), tokenized assets, and enterprise blockchain solutions, with major institutions and governments piloting blockchain-based systems.

A distinction exists between direct liquid token exposure and thematic blockchain and crypto investing. Liquid tokens, such as bitcoin, are as the name suggests, publicly traded. As such, they have exhibited a higher observed correlation to risk assets. They are also more directly influenced by retail investor sentiment, particularly as liquid crypto markets operate 24/7 and are easily accessible to individual investors. This contributes to their high observed volatility. For example, bitcoin has experienced 11 drawdowns exceeding 50% since 2011, with the most recent—a 77% decline—occurring from November 2021 to November 2022.

Thematic blockchain and crypto investing, typically accessed through VC funds, offers diversified exposure to companies and projects building in the space (Figure 2). Given the generally illiquid nature of these investments, their observed volatility tends to be lower. While these investments are subject to the typical risks associated with early-stage VC—such as high failure rates, uncertain business models, and limited operating history—they also offer the potential for outsized returns. ⁴ Venture structures foster strong alignment between limited partners (LPs) and general partners and suit the extended development timelines of blockchain innovation. Their legal and operational frameworks support patient capital, enabling managers to realize value as projects mature.

Thematic blockchain and crypto investing can also be implemented via a hedge fund structure. Most hedge funds pursuing early-stage crypto investments use side pockets to manage illiquid assets, isolating them from the main portfolio to help reduce asset-liability mismatches. These structures can offer more frequent liquidity for the liquid portion of the portfolio and provide access to both liquid and venture-style opportunities, allowing investors to target venture-like returns. However, investments held in side pockets may remain illiquid for extended periods—sometimes even longer than the typical term of a VC fund. As a result, LPs should carefully evaluate the fund’s structure and liquidity terms, as the flexibility of a hedge fund does not necessarily extend to all underlying investments.

For investors seeking strong alignment, a defined investment horizon, and patient capital suited to the extended development timelines of blockchain innovation, the longer-term orientation of BCVC fund structures may be more appropriate for accessing early-stage opportunities in the space.

Performance

BCVC funds’ strong performance track record is a key reason we believe they merit inclusion in VC portfolios. Over the past ten years, BCVC funds delivered a pooled net internal rate of return (IRR) that surpassed that of other VC funds (Figure 3). We do not attribute this outperformance to differences in fund size, as sizes have been largely comparable. Rather, we believe it is partly connected to exceptional gains in the broader crypto market—including bitcoin—which have increased interest in the space and technology.

Examining BCVC fund vintages reveals how timing and entry conditions can shape outcomes. Vintages launched during crypto “winters”—periods marked by sustained declines in cryptocurrency prices, negative sentiment, and reduced market activity—have often benefited from lower entry valuations, less competition for deals, and exposure to resilient projects. These conditions have positioned such funds for strong performance as markets recover. For example, the IRR for the 2018 vintage of BCVC funds has been 39% since inception, highlighting the potential for outsized returns when capital is deployed counter-cyclically.

Beyond IRR, other performance metrics also highlight the strength of BCVC funds. Despite the relatively short history and limited universe of institutional-quality BCVC funds prior to 2018, available data indicate that total value to paid-in (TVPI) multiples have generally been robust (Figure 4). Realized returns (DPI) remain modest, but this pattern is not unique to BCVC; it reflects the long time horizons and exit dynamics typical of VC investing more broadly.

Beyond absolute return metrics, funds have also compared favorably to public equities in relative terms. Our modified Public Market Equivalent (mPME) analysis demonstrates that, over the past ten years, BCVC funds have outperformed major public equity indexes—including US equities, which themselves have delivered strong returns—highlighting their potential to enhance value within diversified VC portfolios (Figure 5).

Performance dispersion is another important consideration. BCVC funds exhibit a range of outcomes similar to the broader VC universe. The interquartile range of returns over the past ten years reached approximately 20 percentage points (ppts)—slightly wider than the 15 ppts observed in non-BCVC funds, and much greater than the sub-5 ppt range typical of public equity strategies (Figure 6). This variability underscores the importance of rigorous manager selection and thorough due diligence, as well as thoughtful manager sizing and new fund commitment pacing, since the difference between top- and bottom-quartile performers can be substantial.

Thematic drivers

Another key reason to include BCVC funds with traditional VC strategies is their unique exposure to new and evolving areas of innovation. Several key trends—such as the convergence of crypto and artificial intelligence (AI), tokenization of real-world assets, and the rapid evolution of stablecoins—demonstrate the unique value creation opportunities accessible through BCVC-backed ventures.

• Crypto and AI convergence. Decentralized platforms are unlocking new models for collaboration and value exchange. For example, Zero Gravity (oG) AI is a next-generation infrastructure that enables AI to operate across distributed networks without relying on centralized servers like traditional AI companies. There are many possible uses for this technology, but potential applications include allowing smart devices—such as home appliances—to securely share and process data directly with each other, coordinating to optimize energy usage while keeping personal information private, or to use unused server capacity at data centers. Similarly, wearable health monitors could one day provide real-time insights to doctors without sending sensitive data to big tech companies.
• Tokenization of real-world assets. Blockchain technology is facilitating the digital representation and ownership of assets such as commodities, stocks, and bonds. Robinhood’s launch of tokenized US stocks allows customers to trade fractionalized shares 24/7, expanding market access and liquidity. Many of these technological advancements originate from privately held companies supported by VC, which benefit from new revenue streams and broader market reach.
• Stablecoins. Stablecoins have become foundational infrastructure for decentralized finance, trading, and cross-border payments, with market capitalization and transaction volumes now rivaling traditional payment networks. In June 2025, Circle’s successful initial public offering (IPO) saw its market capitalization surge from $7 billion to $60 billion, delivering substantial returns to VC investors. Regulatory developments—such as the GENIUS Act and the pending CLARITY Act—are accelerating institutional adoption and driving early-stage investment in stablecoin infrastructure, compliance, and integration with emerging technologies.

These innovation themes, among many others, are directly shaping the evolution of the blockchain and crypto VC landscape. As the sector matures, seed and early-stage funds are closing larger deals at record-high valuations, ⁵ reflecting robust demand for digital asset infrastructure and payments innovation. Recent IPOs and acquisitions—particularly in areas like DeFi, Web3, and stablecoin infrastructure—underscore the market’s appetite for these transformative technologies. While exits via token launches are becoming more common, fully monetized exits remain less established than traditional IPOs or mergers & acquisitions, highlighting the unique dynamics of the space, as well as the emerging nature of the field. Regulatory progress and record stablecoin circulation are fueling investor interest, and blockchain networks and developer tools continue to attract capital. BCVC funds are well positioned to capture the next wave of innovation and growth, making their inclusion in VC portfolios compelling.

Portfolio considerations

The decision to allocate to BCVC funds within a VC portfolio should also consider the degree of crypto-related exposure present in the broader portfolio. The exposure could come in a variety of forms, such as direct crypto holdings, investments in blockchain initiatives (e.g., projects or companies developing or adopting blockchain technology), or significant revenue tied to blockchain-based services. For instance, Strategy (formerly MicroStrategy) alone, which is the world’s largest corporate holder of bitcoin, contributes roughly 6 basis points of exposure to the MSCI All Country World Index. Private equity and VC portfolios may also include stakes in the space or related fintech firms, exchanges, or infrastructure providers. We believe having up to 1%–2% exposure in blockchain-related assets at the total portfolio level is appropriate.

Once current exposure is clarified, investors should ensure they have confidence in the managers responsible for navigating the rapidly evolving crypto landscape. Specialist managers with deep technical expertise and sector knowledge are well positioned to identify opportunities and manage risks, considering the wide dispersion of the funds in the space. A disciplined, research-driven approach—grounded in understanding the technological foundations, market dynamics, and practical applications of blockchain—can help investors participate in the sector’s growth while maintaining appropriate risk controls. Strong conviction in manager capability is essential for sound allocation decisions.

One distinctive aspect of BCVC funds is they often generate significant liquid token holdings once private investments in projects launch public tokens through an Initial Coin Offering (ICO) or Token Generation Event (TGE). Because tokens are typically much more volatile than public equities or traditional private investments, the overall volatility of BCVC funds can be substantially higher than LPs might expect from conventional private investments—sometimes as early as three to five years into the fund’s life. As a result, BCVC investors should anticipate greater swings in quarter-to-quarter portfolio valuations and calibrate their expectations accordingly. While this increased volatility can be challenging, it also creates the opportunity for funds to return capital earlier, since ICOs and TGEs often occur much sooner than traditional IPOs.

BCVC funds—especially those managed by blockchain specialists—provide access to a broad spectrum of opportunities within the digital asset ecosystem. These funds invest across diverse themes such as DeFi, infrastructure, applications, and AI integration. The broader crypto market includes both venture-stage projects and liquid tokens, offering exposure to a wide range of technologies and business models. A thoughtfully constructed portfolio of blockchain venture investments—whether by a pure venture structure, a hybrid structure, or a long-lockup hedge fund structure with side pockets—can deliver diversification benefits and access to innovation and growth throughout the blockchain sector.

The strategic role of blockchain and crypto VC in portfolios

The rapid evolution of the cryptoasset sector is creating new frontiers for innovation, diversification, and growth, with BCVC funds standing out as a strategic way to access these transformative opportunities. We believe their strong track records, differentiated exposure to emerging themes, and potential for outsized returns make them a compelling complement to traditional VC strategies.

Looking ahead, the dispersion of outcomes among BCVC funds underscores the importance of rigorous manager selection and thoughtful portfolio construction, investment pacing, and manager sizing. Investors who approach the space with discipline, deep research, and a willingness to engage with specialist managers will be best positioned to capture the next wave of digital innovation. A modest allocation to BCVC funds—alongside other VC strategies—can deliver meaningful exposure to the technologies and business models driving the future of finance and beyond.

As the digital asset ecosystem matures, the case for including BCVC funds in family and institutional VC portfolios is only growing stronger. Those who act proactively and intentionally will diversify their VC portfolios and gain access to the engines of tomorrow’s growth.

Graham Landrith also contributed to this publication.

Footnotes

1. In this paper, “blockchain and crypto” refers to VC strategies that invest in companies and projects developing blockchain technology, as well as those building applications and infrastructure across the broader crypto ecosystem. This includes areas such as DeFi, Web3, and tokenization.
2. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
3. “Cryptoassets” serves as a catch-all term to describe cryptocurrencies and all other blockchain applications.
4. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
5. Please see “Crypto VC Trends: Q2 2025,” PitchBook Data, Inc, August 19, 2025.

The post Unlocking Innovation with Blockchain and Crypto Venture Capital Funds appeared first on Cambridge Associates.

Understanding the Cycles: A Historical Perspective

Recent USD weakness has revived concerns about its “reserve currency” status. However, this erosion arguably began in 1971, when President Richard Nixon effectively ended the Bretton Woods fixed exchange rate system. Since then, the US share of global GDP and trade has declined from about 35% to 26%, while International Money Fund data show the USD share of global foreign exchange reserves peaked at 73% in 2001 and has since dropped to 58%.

Concerns about the dollar’s reserve status resurface every decade. Since 1971, the US dollar has experienced three major cycles, with bull and bear phases typically lasting around a decade. With the US dollar peaking in late 2022 in both nominal and real (i.e., inflation-adjusted) terms, we are likely entering another multi-year bear market for the dollar, even as it remains the world’s primary reserve currency. The size of the US economy and its financial markets will likely sustain the dollar’s preeminence, but this does not rule out a significant extended cyclical decline.

Why Might the Cycle Be Turning?

Portfolio inflows into US equities and bonds—not central bank reserve accumulation—have driven the dollar higher in recent years. These inflows surged due to higher US yields and the outperformance of US equities and the broader economy. This created a virtuous cycle: rising asset prices attracted increasing inflows—particularly unhedged investments—as investors sought to capitalize on a strengthening dollar and minimize hedging costs.

This cycle now appears to be reversing. US assets are markedly overvalued. At its recent peak, the real value of the dollar reached levels not seen since 1985, exceeding prior peaks in 1971 and 2002. US equities are also trading at extreme valuations—both in absolute terms and relative to global peers—and have started to underperform non-US equities.

At the same time, ballooning US current account and fiscal deficits have increased US dependence on international capital. Portfolio inflows of approximately $1.2 trillion support the $1.3 trillion current account deficit, while foreign buyers make up 34% of the US Treasury market. For the dollar to remain strong, the United States must continue to attract enough capital to finance its deficits. If not, the dollar will fall, forcing deficit adjustments. Foreign investors do not need to sell their existing US assets for the dollar to fall; they simply need to allocate less. While the Trump administration has expressed a desire for more inbound investment, it is unclear if current policies will be effective. Furthermore, US tariff policies aimed at shrinking the trade deficit may reduce the supply of surplus dollars available for recycling into US assets. President Donald Trump has also advocated for a weaker dollar to boost exports and reduce the trade deficit. Talk of a “Mar-a-Lago Accord” to coordinate a USD devaluation has spooked foreign investors. In general, uncertainty over US economic policy may continue to prompt foreign investors to shift portfolios away from the United States, putting further downward pressure on the dollar.

US fiscal policy is also contributing to this reversal. Increased Treasury issuance and concerns over the sustainability of US debt levels have seen investors demand an extra risk premium to hold US Treasury bonds. ⁶ While higher yields have historically supported the dollar, this relationship has weakened as foreign investors now worry about both bond price declines and currency depreciation. A positive yield spread alone is not enough to support the dollar, and there have been periods in the past whereby the US dollar has weakened despite having a yield premium versus other currencies.

Fiscal and monetary divergence between the United States and other economies is another key factor. US trade and immigration policies are expected to both slow growth and keep inflation elevated. Consensus forecasts see US GDP growth averaging only 1.6% over the 2025–27 period versus the above-trend 2.7% rate seen over the past three years. Yet, despite slower growth, inflation is forecasted to average 2.7% versus the pre-pandemic average below 2%. With US government debt-to-GDP projected to reach 150% in the coming decades—driven in part by tax cuts from the recently enacted One Big Beautiful Bill Act—fiscal space in the United States will become increasingly limited. At the same time, the Federal Reserve may face constraints in lowering interest rates if inflation remains persistent. In contrast, the hit to growth outside of the United States is forecasted to be lower, while inflation is also expected to slow more. Thus, other countries may have more room to increase fiscal spending and lower interest rates, as recently seen in Europe and China. The result may be a cyclical boost for non-US economies, while curtailed US government spending and higher yields drag on US growth.

The US dollar’s resilience depends on sustained capital inflows, supported by superior growth, attractive asset returns, and stable fiscal dynamics. A productivity boom driven by artificial intelligence (AI), combined with large scale foreign direct investment related to AI infrastructure and reshoring/reindustrialization, could support the US dollar and limit future weakness. It remains to be seen to what extent the US lead in AI will be maintained and policies related to attracting foreign direct investment will be successful. Further, much of this AI optimism is already priced into US equities.

In sum, overvalued assets, policy uncertainty, and a deteriorating cyclical relative growth outlook are prompting capital to move away from the United States. This shift could turn the past decade’s virtuous cycle into a more challenging environment for the dollar, at least until valuations and deficits correct. Historically, periods of dollar weakness have seen declines of more than 30%. With the dollar down ~10% from its recent peak and still about 20%+ overvalued in real terms, there is ample room for further depreciation, especially since we are, at best, three years into what could be a ten-year cycle.

Is USD Weakness Already Priced In?

Bearish sentiment on the US dollar is quickly becoming consensus. With the US dollar down 9% year-to-date and 6% over the past 12 months, it is reasonable to ask whether the sell-off is overdone. Historically, it typically needs to fall more than 10% year-over-year before staging a meaningful rally. We may be approaching that threshold, suggesting a rebound could be on the horizon. USD rallies often occur amid market “risk-off” periods, consistent with the “Dollar-Smile” concept that states the US dollar tends to appreciate when US growth is either much stronger than elsewhere (as in recent years) or when US growth is much weaker (such as during a recession), prompting a flight to safety. Such rallies can happen even within broader USD bear markets, as seen in 1974 and 2008, when the dollar’s “safe-haven” appeal was questioned.

We are negative on the US dollar on a multi-year horizon, while recognizing the decline will not be linear. For example, the dollar will likely rally amid a US recession or a global risk-off scenario. Ultimately, US policy changes will shape the path, magnitude, and duration of any down cycle. For now, the path of least resistance appears downward, and investors should adjust portfolios accordingly. Among major developed currencies, the US dollar is most overvalued relative to the yen, but it also remains expensive compared to other currencies. Given that US dollar overvaluation is widespread, we prefer a diversified approach to US dollar underweights rather than concentrating risk by targeting one or two of the most extreme currency pairs.

Understanding Allocation Drift

Many investors may not realize how much their USD exposure has increased as they have not actively increased allocations. The strength of the US dollar and US assets over the past decade has led USD assets to dominate market cap–weighted indexes, particularly in global equity benchmarks. At the end of December 2024, the United States made up 67% of the MSCI ACWI—the highest on record—up from 42% in 2010. This rise reflects both US equity outperformance and dollar strength, as index weights are based on USD market capitalization. If the dollar declines, the US equity weight in the MSCI ACWI will also fall, all else equal.

With the dollar about 20%+ overvalued, a decline of that magnitude could reduce the US weight in the MSCI ACWI from 64% to 52%. This would align with the 50% average US weight in the index since 1970. The MSCI ACWI weight to US equity will depend on both the US dollar and US equity valuations, but history suggests the current level may not be sustainable, especially if the dollar weakens.

While the drift toward the US dollar in global equities has been significant, other asset classes, such as private equity and private credit, have seen more stable or declining USD exposure since 2010. Investor experience in private markets is likely to vary considerably as it is less common to have market cap–weighted allocations. Hedge fund portfolios are usually USD-dominated, but exposures can vary significantly across funds and over time, making broad generalizations difficult.

Experience across investors will differ, but in general, the primary driver of portfolio drift over the prior US dollar bull market will be due to the shift in global equity weights. In the simple example of a 70% global equity/30% bond portfolio, USD allocations have increased by about 15 percentage points (ppts) since 2010, assuming bond allocations are hedged to or denominated in the base currency. While the level of US dollar exposure differs for investors with USD and non-USD base currencies, the drift in a 70/30 portfolio is the same and driven by equities. This is because the total portfolio drift is simply the global public equity weight multiplied by the increase in USD weight within global equities (70% global equities multiplied by the 22 ppts increase in USD weight).

Diversified portfolios will have lower allocations to global equities, and thus are likely to have experienced less drift into US dollars and US dollar assets. For example, a portfolio with a global public equity allocation of 40%—roughly the median allocation of endowments and foundations—would have seen a USD drift of about 9 ppts, assuming its US equity share shifted similarly to the global equity index.

How Much US Dollar Exposure Is Appropriate?

There is no single “right” level of USD exposure, but a reasonable approach is to consider how much portfolio benchmarks have drifted because of US dollar strength. While the global public equity index has drifted 22 ppts toward the US dollar, we should not assume that will all be reversed in the coming cycle. A more conservative assumption would be a 10-ppt drop in USD share of global equities, bringing it close to what would be expected based on valuations and the historical average US equity/USD weight. Other considerations include asset/liability matching (i.e., the currencies in which investors spend) and tax implications of realizing gains on US assets.

Policy Change or Tactical Underweights?

For most investors, tactical positioning is the preferred approach to managing elevated USD exposure. We make this assessment based on our portfolio drift framework. Revisiting the example discussed above, an investor with a 40% allocation to global public equities would have seen total portfolio drift into USD assets of roughly 9% through the middle of 2025 since 2010. To get ahead of an expected unwind, we would tactically underweight the US dollar by 4 ppts, reflecting a 10-ppt decline in USD exposure for 40% of the portfolio.

While global equities have been the primary source of the USD drift, we do not recommend concentrating all moves away from the US dollar solely in global equities. Indeed a 4-ppt underweight to US public equities within global equities is a large portfolio bet that could overwhelm other sources of value added in the portfolio if it does not work out as planned. ⁷ Fortunately, there are other attractive means to tactically underweight the US dollar, such as underweighting USD bonds relative to non-dollar bonds or adding emerging markets local currency debt (EMD-LC) in place of USD–denominated diversifiers. Investors can combine several attractive positions in a risk-controlled manner to underweight USD exposures by 3 ppts–5 ppts.

However, in rare cases where portfolios have experienced significant drift into US dollars—particularly when the asset owner’s primary spending currency is not the US dollar and currency risk is therefore elevated—tactical adjustments alone may not be sufficient. In these situations, a more structural, policy-level change may be warranted. For example, in the case of an investor with a 70% global equities/30% bond portfolio that experienced 15 ppts of drift into US dollars, an underweight of 7 ppts would be required to address our expected 10-ppt unwind. Such large positions are better addressed through changes to policy portfolios.

When a policy change is appropriate, best practice is to secure buy-in from key stakeholders and codify the change in investment policy statements and benchmarks. This positioning should be reflected either through a currency policy (i.e., target currency exposure or hedge ratio) or a change in policy asset allocation targets, for example, by splitting the global equity benchmark into US and global ex US components. The strategy’s success should be measured over a longer horizon—typically five to ten years—by comparing the policy benchmark to a stock/bond volatility-equivalent benchmark. If valuations revert to historical averages more quickly, the policy underweight could be closed earlier.

Performance Impact of Large US Equity Underweights

An investor with a 70/30 portfolio that underweighted the US dollar by 10 ppts during prior bear markets would have benefited over the full bear cycle but would have experienced frequent 12-month periods of underperformance, sometimes as significant as 2% to 3% at the total portfolio level.

Performance attribution analysis shows that most of the outperformance from such positioning during full USD bear markets came from the currency component, with the local currency US equity underweight playing a secondary—and at times, offsetting—role.

In summary, investors seeking to underweight the US dollar by more than 4 ppts to 5 ppts should reflect such positioning in investment policy.

What Should Investors Do?

For most investors, tactical positioning, such as overweighting non-US equities and unhedged non-USD bonds, is sufficient and appropriate. In cases where USD exposure in policy portfolios has drifted significantly higher, a policy change may be warranted, either through asset allocation shifts or increased foreign exchange (FX) hedging. Policy changes should be codified in policy benchmarks and evaluated over longer time horizons (5+ years).

Implications differ for USD-based and non-USD-based investors. Most USD-based investors have ample room to increase non-USD assets, whether by allocating to unhedged non-US equities or bonds, or by using global managers willing to tilt away from the United States. Increasing non-US private investments may also be warranted, but tilting public allocations to underweight US assets can help offset high USD exposure in private investments.

For non-USD-based investors, the situation is more nuanced. The upside to underweighting the US dollar depends on the degree of overvaluation relative to the investor’s base currency. Increasing hedge ratios or moving to hedged share classes may be more appropriate than overweighting non-USD assets, particularly for private investments and hedge funds. In general, hedging back to home currency—either via overlays or hedged share classes—should be considered for investors with sufficient scale to make hedging cost effective.

Reviewing the Menu of Options

There are several ways to reflect our negative view on the US dollar, including overweighting global ex US equities versus US equities, overweighting global ex US sovereign bonds relative to US Treasury bonds or implementing an FX futures overlay.

Increase Non-US Equity Exposure

The primary driver of increased USD exposure has been US equities, which are overvalued both in absolute terms and relative to global ex US equities. Since most unhedged FX exposure in portfolios comes from equities, increasing non-US equity allocations is the simplest way to reduce USD risk. This tilt typically results in less exposure to information technology and more to cyclical sectors, such as financials and industrials. Active global equity managers may already be making these adjustments.

Tilting private equity and venture capital allocations toward non-US assets will take time, but these allocations should also benefit in a multi-year weak dollar cycle. Still, currency considerations should not be the sole driver of private investment allocation decisions; manager selection and investment fundamentals remain paramount.

Increase Unhedged Non-Dollar Bond Exposure

Another appealing option is to increase unhedged non-US dollar bond exposure. Most investors hold domestic fixed income or hedge global exposure back to their home currency. Increasing unhedged fixed income exposure is relatively straightforward and provides more direct FX exposure than unhedged non-US equities, since FX volatility becomes the main driver of returns. However, overweighting non-USD or unhedged global bonds usually results in negative carry compared to US fixed income and increases bond allocation volatility. This trade-off—potential for extra return versus higher volatility—should be assessed carefully and may limit the amount of unhedged FX exposure appropriate for fixed income allocations.

Increase Diversifier Exposure

A more suitable place to take FX risk may be in “diversifier” allocations, such as absolute return fixed income or hedge funds (macro, trend following) that actively manage rates and currencies. These strategies offer indirect currency exposure, are actively managed, and provide less correlated sources of return. A more volatile and divergent macro environment should favor such strategies. EMD-LC is another asset class that should perform well in a weak dollar environment, offering attractive yields (6%+) and undervalued currencies with appreciation potential (10%+), along with diversification properties.

Commodities, Gold, and Crypto

Commodities and gold are traditionally seen as weak dollar plays, with prices typically rising as the dollar falls. Gold has the most consistent negative correlation to the US dollar, making it an effective—though volatile—way to play continued USD weakness. However, gold has rallied sharply in recent years amid geopolitical concerns and dollar weakness, which makes us cautious about recommending that investors chase it higher. Commodities are less reliable as a weak dollar play, as they remain vulnerable to slowing global growth and trade disruptions, and their correlations to the dollar have increased in recent years. Macro hedge funds may also provide exposure to these assets. Cryptocurrencies might seem like a logical hedge against dollar weakness, but their correlation with the dollar is unstable and the historical record is too limited for high conviction.

Currency Overlay

Another way to adjust currency exposures is through an FX futures overlay, either directly or via an overlay manager. This method does not require changes to underlying asset allocations or manager rosters and allows FX exposures to be quickly adjusted. However, overlays introduce operational complexity, costs, and the need to determine a specific hedge ratio. For instance, for USD-based investors seeking to reduce USD exposure, the overlay would go long on a specific currency or basket of currencies, thereby offsetting some of the portfolio’s US dollar risk. For this reason, reducing USD exposure through asset allocation changes is the most straightforward approach, particularly given compelling opportunities in non-USD investments.

Non-USD-based investors may find it more convenient to use home currency–hedged share classes, though not all managers/funds offer these. For example, private investments and hedge funds tend to be US-asset focused. Thus, non-US investors with large allocations to such strategies may have more USD exposure than desired and may need to consider overlay strategies to adjust overall portfolio USD exposure.

Conclusion

The US dollar’s decade-long strength has left many investor portfolios with elevated downside risk. For most investors, a tactical underweight to the US dollar is appropriate. The optimal level and method of USD reduction will depend on each investor’s base currency, portfolio structure, and risk tolerance. A diversified, risk-controlled approach—rather than concentrated bets—remains the best practice. By proactively managing USD exposure, investors can better position portfolios for a changing currency environment and mitigate the risks of a prolonged USD decline.

Drew Boyer, Grayson Kirk, and David Kautter also contributed to this publication.

Index Disclosures

Bloomberg US Aggregate Bond Index
Bloomberg US Aggregate Bond Index is a widely used benchmark for the investment-grade, USD-denominated, fixed-rate taxable bond market. It represents a broad spectrum of publicly traded bonds in the United States, including Treasuries, government agency bonds, corporate bonds, mortgage-backed securities, and asset-backed securities. The index is commonly used by investors to gauge the overall health of the US bond market and as a benchmark for bond funds.

FTSE® World Government Bond Index (WGBI)
FTSE® World Government Bond Index (WGBI) measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI is a widely used benchmark that currently includes sovereign debt from more than 20 countries, denominated in a variety of currencies, and has more than 30 years of history available. The WGBI provides a broad benchmark for the global sovereign fixed income market. Sub-indexes are available in any combination of currency, maturity, or rating.

LBMA Gold Price Benchmark
The LBMA Gold Price benchmark is the global benchmark price for unallocated gold delivered in London, and is administered by ICE Benchmark Administration Limited.

MSCI All Country World Index (ACWI)
The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 24 emerging markets (EM) countries. With 2,558 constituents, the index covers approximately 85% of the global investable equity opportunity set. DM countries include Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. EM countries include Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Peru, the Philippines, Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, and the United Arab Emirates.

MSCI Emerging Markets Index
The MSCI Emerging Markets Index captures large- and mid-cap representation across 24 emerging markets countries. With 1,203 constituents, the index covers approximately 85% of the free float–adjusted market capitalization in each country.

MSCI US Index
The MSCI US Index is designed to measure the performance of the large- and mid-cap segments of the US market. With 626 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the United States.

MSCI World Index
The MSCI World Index represents a free float–adjusted, market capitalization–weighted index that is designed to measure the equity market performance of developed markets. It includes 23 DM country indexes.

MSCI World ex US Index
The MSCI World ex US Index captures large- and mid-cap representation across 22 of 23 DM countries—excluding the United States. The index covers approximately 85% of the free float–adjusted market capitalization in each country.

MSCI World 100% Hedged to USD Index
The MSCI World 100% Hedged to USD Index represents a close estimation of the performance that can be achieved by hedging the currency exposures of its parent index, the MSCI World Index, to the USD, the “home” currency for the hedged index. The index is 100% hedged to the USD by selling each foreign currency forward at the one-month forward rate. The parent index is composed of large- and mid-cap stocks across 23 developed markets countries and its local performance is calculated in 13 different currencies, including the euro.

S&P GSCI Index
The S&P GSCI is the first major investable commodity index. It is one of the most widely recognized benchmarks that is broad-based and production weighted to represent the global commodity market beta. The index is designed to be investable by including the most liquid commodity futures, and provides diversification with low correlations to other asset classes.

US Dollar Index (DXY)
The US Dollar Index measures the value of the US dollar relative to a basket of top six currencies: CAD, CHF, EUR, GBP, JPY, and SEK.

Footnotes

1. In this paper, “blockchain and crypto” refers to VC strategies that invest in companies and projects developing blockchain technology, as well as those building applications and infrastructure across the broader crypto ecosystem. This includes areas such as DeFi, Web3, and tokenization.
2. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
3. “Cryptoassets” serves as a catch-all term to describe cryptocurrencies and all other blockchain applications.
4. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
5. Please see “Crypto VC Trends: Q2 2025,” PitchBook Data, Inc, August 19, 2025.
6. We continue to believe that US Treasuries are a useful diversifier, while acknowledging the benefit of maintaining additional diversifying assets.
7. We estimate that the tracking error of US equities versus global ex US equities is 11.5%, giving a 4.3-ppt position active risk of roughly 50 basis points, on the high side of our comfort level for tactical positions.

The post VantagePoint: What to Do About the US Dollar? appeared first on Cambridge Associates.

Gold’s performance this year has been exceptional, gaining 25% through April 23 close and surpassing the returns of other major asset categories. This surge has fueled bullish forecasts and renewed debate about gold’s role in portfolios. The rally has been underpinned by the Trump administration’s trade policies, which have heightened fears of a global economic slowdown, a rise in US inflation, and the potential for greater declines in the dollar. These risks have motivated investors to turn to gold as a potential hedge.

Historically, the dollar’s performance has had a negative correlation with gold. Since 2000, when the trade-weighted dollar has declined by more than 3% in a quarter, as it did in first quarter 2025, gold has averaged a 7% quarterly return. If the economic landscape deteriorates further due to protectionist policies, a decision by President Donald Trump to undermine the independence of the Federal Reserve, or some other issue, it could add pressure to the dollar and support greater flows to gold.

However, there are several key reasons why gold’s future performance could disappoint. First, gold recently touched its highest inflation-adjusted price ever, reaching $3,500 per troy ounce. This tops the real price that it reached in 1980. From these levels, gold’s momentum could be due for a reversal. History offers cautionary lessons after gold’s cyclical peaks: after surging during the stagflationary 1970s, gold lost 62% of its value in just 2.5 years when the Fed tightened policy. More recently, gold declined by 30% in 2012–13 after a rapid run-up during the Global Financial Crisis.

Second, much depends on the persistence of US political uncertainty and investor sentiment. If the Trump administration pivots toward more pro-growth policies, de-escalates tariffs, or restores confidence in the dollar, gold’s safe-haven appeal could diminish. In recent days, we have seen indications of US progress toward trade agreements with India and Japan, and signs that tariffs on China may be lowered. Moreover, recent bond market volatility appears to have prompted the Trump administration to adopt a more conciliatory approach on trade policy, likely in an effort to reassure investors and restore market stability.

Third, central bank demand may no longer provide the same structural support to bullion prices that supported gold’s rally in recent years. Central banks ramped up gold purchases around the time of Russia’s 2022 invasion of Ukraine, but buying has since stabilized at high levels. If this trend continues, ongoing central bank demand should still help underpin prices, though the market’s adjustment to higher purchase levels means the marginal impact of further buying is likely to be less significant than during the initial surge.

With gold now trading near record inflation-adjusted highs and bullish sentiment widespread, the risk of a significant pullback is elevated. History reminds us that rapid price gains can quickly reverse, especially if investor sentiment shifts or US policy uncertainty abates. For most investors, this may be an opportune moment to realize gains rather than initiate new allocations. For some investors—for instance those with significant unhedged US dollar exposures and liabilities denominated in another currency—it may be prudent to delay rebalancing gold allocations. Maintaining these positions could provide a hedge if uncertainty increases, though this approach may forgo some of the gains embedded in gold allocations within the portfolio. Ultimately, the decision to hold or trim gold should be grounded in a number of factors, including the asset owner’s currency exposures, risk tolerance, and other portfolio holdings.

Footnotes

1. In this paper, “blockchain and crypto” refers to VC strategies that invest in companies and projects developing blockchain technology, as well as those building applications and infrastructure across the broader crypto ecosystem. This includes areas such as DeFi, Web3, and tokenization.
2. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
3. “Cryptoassets” serves as a catch-all term to describe cryptocurrencies and all other blockchain applications.
4. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
5. Please see “Crypto VC Trends: Q2 2025,” PitchBook Data, Inc, August 19, 2025.
6. We continue to believe that US Treasuries are a useful diversifier, while acknowledging the benefit of maintaining additional diversifying assets.
7. We estimate that the tracking error of US equities versus global ex US equities is 11.5%, giving a 4.3-ppt position active risk of roughly 50 basis points, on the high side of our comfort level for tactical positions.

The post Is Gold’s Rally Sustainable? appeared first on Cambridge Associates.

Having outgrown its Eurozone peers in the 12 to 15 years since the Global Financial Crisis, continued US economic outperformance was unsurprisingly anticipated this year. As of the end of February, the consensus expectation for 2025 GDP growth was 2.3% for the United States versus 0.9% for the Eurozone. However, recent US tariffs have disrupted these forecasts, impacting global growth and inflation expectations. The growth impact outside the United States will depend on how long the announced tariffs are in place, the degree of demand destruction, and the extent of any retaliation. In contrast, the uncertainty for US businesses and consumers seems likely to weigh substantially on growth even before the direct impact of the tariffs is felt. As a result, growth expectations have converged, with latest forecasts projecting economic growth of 1.7% for the United States and 0.8% for the Eurozone this year.

Even before this, however, structural change was afoot within Europe. Germany’s pivot from fiscal orthodoxy to significant infrastructure and military spending, alongside the EU’s push for increased defense budgets, signal a proactive response to weak growth and geopolitical changes. At the same time, the Trump administration has vowed to reduce the US budget deficit. While the running deficit is actually up on the year so far, there appears to be limited room to meaningfully expand the current 6%+ deficit. Furthermore, the inflationary impact of tariffs in the United States may frustrate the swiftness and extent with which the Federal Reserve can provide support. By contrast, inflation in Europe is closer to target, while US tariff policy should prove disinflationary for the region. All told, Europe should have more policy flexibility to mitigate the impacts of the tariff regime. Therefore, further convergence in expected growth rates look more likely as the year progresses.

Consistent with this, the US equity market has underperformed its peers this year, with the challenge to US growth conditions from tariffs serving as the catalyst. However, it has not been just those sectors with the greatest direct exposure to tariffs that have underperformed the most, but also the most richly valued companies, which have a large weight in US indexes. Clearly, recent policy volatility is not consistent with the broadly accommodative macro conditions that are required to keep valuations near historically elevated levels. Despite recent declines, growth stock valuations remain elevated compared to the broader market. As a result, we continue to recommend that investors moderately tilt towards developed markets value equities, which offer a margin of safety. The resulting modest overweight to ex US equities reflects the growing importance of regional diversification as US capital attraction faces policy-driven challenges.

While there is some underlying diversity in US equity exposures, namely across different sectors (even if somewhat diminished recently) and globally derived revenues, one of the most concentrated exposures in many portfolios is the US dollar. Given the US weight in both public and private markets, as well as some alternative strategies, it is not uncommon for European portfolios to have an exposure of 40%–50% to the US dollar. Thus far, investors have been well served by their dollar exposure. It has both been in an uptrend for the past 14 years and acted as a partial hedge for portfolios, reliably rallying when risk assets declined. There are reasons to question whether these trends for the dollar will continue. As the US dollar valuation reapproached its most extended levels in recent months, we believed that growth and interest rate convergence between the United States and its peers was likely and presented downside risks for the greenback. We continue to hold this view, and now add to the list of drivers a potential structural reduction in demand for US assets prompted by evolving trade and geopolitical policies.

What’s more, the United States has been the source of the recent market volatility, with fears of its economic underperformance and foreigners’ desire to repatriate capital depriving the dollar of its risk-off qualities. If future bouts of volatility also originate from, or are centred on, the United States, it may continue to disappoint as a hedge. Similarly, it may turn out that recent US policy actions end up accelerating what has been the glacial erosion of the dollar’s dominant reserve currency status. Therefore, if in times of stress, foreign investors come to view the United States as a funding source, rather than a destination for capital, the dollar may behave differently than in times past. This, of course, is not pre-ordained, but the subjective probability has increased. For now, as the dollar remains the dominant currency of trade and account, it retains the capacity to appreciate in the event of a global dollar funding squeeze. A reversal in current tariff policy could also see the dollar gain some short-term support.

There is no one-size-fits-all approach to dealing with concentrated positions within portfolios. Broader diversification can help reduce risks tied to a single economy. Reducing overall US dollar currency exposure—whether through greater domestic currency investment or increased currency hedging—may also improve diversification, though each approach involves its own opportunity and explicit costs. Furthermore, such decisions cannot be taken in isolation, as they are inherently linked to other portfolio decisions, such as the size of safe-haven bond allocations and other diversifier allocations. Overall, awareness of exposures, understanding how they may behave in different environments, and diversifying those that present excessive risks remains key to prudent portfolio management.

Footnotes

1. In this paper, “blockchain and crypto” refers to VC strategies that invest in companies and projects developing blockchain technology, as well as those building applications and infrastructure across the broader crypto ecosystem. This includes areas such as DeFi, Web3, and tokenization.
2. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
3. “Cryptoassets” serves as a catch-all term to describe cryptocurrencies and all other blockchain applications.
4. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
5. Please see “Crypto VC Trends: Q2 2025,” PitchBook Data, Inc, August 19, 2025.
6. We continue to believe that US Treasuries are a useful diversifier, while acknowledging the benefit of maintaining additional diversifying assets.
7. We estimate that the tracking error of US equities versus global ex US equities is 11.5%, giving a 4.3-ppt position active risk of roughly 50 basis points, on the high side of our comfort level for tactical positions.

The post US Policy Changes Highlight Need for Portfolio Diversification appeared first on Cambridge Associates.

The US Dollar Rally Should Cool in 2025

Aaron Costello, Head of Asia, and Vivian Gan, Associate Investment Director, Capital Markets Research

We expect the US dollar to continue to strengthen in early 2025 but weaken modestly in late 2025 due to moderating US economic growth, Fed rate cuts, and lingering overvaluations. However, the dollar may be volatile, given uncertainty over US fiscal, trade, and monetary policies, as well as the dollar’s tendency to rally amid periods of market stress.

Indeed, the US dollar has rallied 4.9% over October and November, with the market viewing Trump’s trade and fiscal policies as potentially boosting US growth and inflation. As a result, markets have pared back Fed rate cut expectations, which have boosted US bonds yields and supported the dollar’s recent rally. At the same time, markets are also expecting that the Trump administration will increase tariffs on US imports, which would put downward pressure on other currencies and support the dollar.

Despite the above, the US dollar could still weaken in 2025 if US growth slows while growth in DM ex US accelerates as implied by consensus forecasts. ⁸ While tariffs may place downward pressure on growth outside the US, a slowing US economy would still see Fed rate cuts, therefore reducing support for the dollar. Furthermore, should China’s stimulus gain traction and China reflation take hold, EM growth should pick up, and the US dollar may weaken against EM currencies.

Overall, valuations for the US dollar remain very elevated, which imply the currency should face downward pressure in the medium term. To the extent that markets have priced in a reflationary backdrop, continued dollar strength will require further upside growth surprises in the US, which may not occur. Therefore, while the US dollar may continue to appreciate in the near term, we still expect the currency to lose steam in 2025 as US growth trends lower and as the Fed continues to ease policy.

Gold Returns Should Moderate in 2025

Sehr Dsani, Senior Investment Director, Capital Markets Research

Gold prices are at their highest levels in more than 50 years. In 2024, prices surged nearly 30%, ranking as one of the top returns in history. Several factors supported the rally, including its function as a store of value and its appeal as a safe-haven asset during geopolitical unrest and market uncertainty. We think some of these drivers will likely remain in 2025. However, we doubt returns in 2025 will be as lofty as in 2024.

Investors often turn to gold as a store of value to protect against declining yields. However, with monetary easing widely telegraphed, many investors have already positioned for lower yields, making it unlikely to be a significant source of new gold demand in 2025. Similarly, our expectation that key inflation rates will continue to moderate back to central bank targets, albeit in bumpy fashions, may also reduce investor demand. This is also true for central banks, many of whom increased their gold reserves materially in recent years.

Investors also flock to gold in uncertain times. This has occurred around recessions; for instance, gold prices rose as the GFC began, up 45% year-over-year by early 2008. Geopolitical unrest can also drive gold higher, as occurred on 9/11, when prices were up 6%. However, it is rare for prices to remain elevated. Still, geopolitical risk may remain high, given the many existing conflicts, weak relations between the West and China, and the potential for protectionist US policies. But, to some extent, these factors are embedded in prices. With gold prices at all-time highs, we think gold is likely to lag its impressive 2024 return.

Emerging Markets Crypto Use Should Support Positive Crypto Returns in 2025

Joseph Marenda, Head of Hedge Fund Research and Digital Assets Investing

Crypto and blockchain usage hit an all-time high in 2024, driven by 617 million crypto owners globally and 220 million active crypto addresses. The five-year compound annual growth rate for crypto ownership is 99%. What is driving adoption and usage? Many factors, but in 2024 stablecoins found product market fit, particularly in EM countries. Stablecoin use in the crypto economy and real world will be a major driver of the crypto market in 2025.

Invented about ten years ago, stablecoins are digital equivalents of US dollars (or any currency, but 99% of stablecoins are USD backed) that exist on a blockchain. When a user buys a $1 stablecoin, the issuer typically buys $1 of US government debt. In 2018, the market capitalization of stablecoins ranged from $1 billion to $3 billion. Today, stablecoin issuers cumulatively are the 19th largest holder of US debt at $120 billion, more than Germany’s holdings. The growth occurred as stablecoins were increasingly adopted by non-crypto users in EM countries.

Stablecoins have many uses outside of crypto transactions, including as a means of savings, cross-border payments, remittances, and corporate cash management, regardless of country. Emerging markets, in particular, use stablecoins for these activities. With a growing userbase across emerging markets, blockchain protocols and crypto companies are developing USD-based investment products and financial services that will be available globally. This growing pool of USD stablecoins will help drive investment opportunities for crypto VCs, traditional investment managers, and traded blockchain tokens in 2025—making “digital dollars” the dominant use case for blockchain in 2025 and laying the groundwork for global financial systems innovations in 2025 and beyond.

Figure Notes

Real Exchange Rate Valuations for the US Dollar Are Stretched
Trade weights for the US dollar are based on the following: Euro (41.4%), Canadian dollar (27.5%), Japanese yen (11.0%), British pound (10.0%), Swiss franc (6.1%), the Australian dollar (2.7%), and Swedish krona (1.2%). Totals may not sum due to rounding. 2024 inflation data for Australia are through September 30, Eurozone are through November 30, and all others are through October 31.

Gold Returns Rarely Exceeded 30% in Consecutive Years
Real prices are inflation-adjusted. Inflation data are through October 31, 2024. Returns for 2024 are through November 30.

Stablecoin Transaction and Transfer Volume Is Similar to Visa and Mastercard Combined
Data are aggregated.

Footnotes

1. In this paper, “blockchain and crypto” refers to VC strategies that invest in companies and projects developing blockchain technology, as well as those building applications and infrastructure across the broader crypto ecosystem. This includes areas such as DeFi, Web3, and tokenization.
2. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
3. “Cryptoassets” serves as a catch-all term to describe cryptocurrencies and all other blockchain applications.
4. Past performance is not a reliable indicator of future results. All financial investments involve risk. Depending on the type of investment, losses can be unlimited.
5. Please see “Crypto VC Trends: Q2 2025,” PitchBook Data, Inc, August 19, 2025.
6. We continue to believe that US Treasuries are a useful diversifier, while acknowledging the benefit of maintaining additional diversifying assets.
7. We estimate that the tracking error of US equities versus global ex US equities is 11.5%, giving a 4.3-ppt position active risk of roughly 50 basis points, on the high side of our comfort level for tactical positions.
8. Please refer to the Economic Outlook Map.

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