The limits of traditional diversification
Today’s challenge is not simply to hold a variety of managers, but to ensure that each one performs a role in distinct market conditions. Diversification by scenario is not about holding more funds — it’s about holding funds that respond differently when markets change regime.
The market scenario framework
Every investment portfolio ultimately faces four dominant regimes:
1. Calm and Range-Bound Markets – Low volatility, narrow leadership, income strategies thrive.
2. Expanding Bull Markets – Broad participation, growth bias rewarded.
3. Volatility Spikes/Corrections – Correlations converge, liquidity vanishes, behaviour dominates.
4. Prolonged Bear Markets – Capital preservation, cash flow stability, and psychological resilience determine outcomes.
Each of these environments rewards a different type of manager. Instead of blending by factor exposure, advisers can design portfolios that breathe — each sleeve contributing to defense or growth as regimes evolve.
