From asset classes to risk drivers

Traditional portfolio discussions often start with labels like "equities," "bonds," and "alternatives." While these categories are familiar, they can obscure the underlying drivers of risk and return: growth, inflation, real yields, credit spreads, and liquidity conditions.

A different way to think about diversification is to ask which risks the portfolio is actually exposed to in different environments. For example, a 60/40 portfolio of equities and government bonds is still heavily reliant on growth and policy support, even if it appears balanced in nominal terms.

Regime-based framework

Many allocators find it useful to think in terms of broad macro regimes: combinations of growth (strong vs. weak) and inflation (rising vs. falling). Each regime tends to be associated with different patterns of performance across assets and factors.

  • In strong growth, low and stable inflation environments, traditional risk assets like equities often perform well.
  • In weak growth, disinflationary environments, duration-sensitive assets like high-quality government bonds may provide a hedge.
  • In higher and more volatile inflation regimes, commodities, certain alternative risk premia, and inflation-linked instruments may play a more prominent role.

The goal of a regime framework is not to predict with certainty which state will occur next, but to understand how the portfolio might respond across different possibilities—and to decide deliberately which exposures to own.

Diversification in practice

In practice, diversification at the risk-driver level can involve combining multiple sources of return: equity risk premia, duration and curve premia, credit, trend-following, carry, and other systematic strategies. The details depend on the investor's constraints and objectives.

For an institutional portfolio, the process might include:

  1. Mapping existing holdings to their underlying risk drivers, not just asset class labels.
  2. Identifying concentrations or blind spots—such as heavy reliance on a single macro environment or style factor.
  3. Introducing complementary strategies that are expected to behave differently across regimes, while respecting governance and liquidity constraints.

The article structure you see here is intentionally neutral. You can adapt it to describe your own frameworks, case studies, or empirical findings while preserving the same visual and typographic hierarchy.

Important disclaimer

This article is for informational purposes only and does not constitute investment advice or a recommendation. Past performance is not indicative of future results. Please refer to individual strategy documentation for detailed information, including investment objectives, risks, fees, and expenses.