Allocators Focus On Risk Management in Increasingly Complex Environment

Institutional investment allocators are currently navigating one of the most complex, multi-faceted risk environments since the global financial crisis of 2008 and 2009, investors and strategists agree. Wars, trade fragmentation and the uncertainty of persistent inflation are driving a more unstable macroeconomic regime, with policy decisions increasingly affecting market outcomes.

Allocators are increasingly adopting a broader risk management lens when it comes to liquidity, influenced by geopolitical concerns, according to Northern Trust’s 2026 global asset owner survey.

These factors are also impacting allocation decisions. According to Coller Capital’s 44th global private capital barometer, released in June, 37% of institutional investors said the geopolitical environment and outlook were influencing their allocation decisions in private markets.

“I think all of these factors are tied up in the notion that we’ve had a very long bull market, valuations across most asset classes feel very rich, and many of the hedges that investors felt that they had available to them—risk-mitigating assets—have changed their nature over the last five years,” says Adam Farstrup, head of multi-asset for the Americas at Schroders. “They’re feeling vulnerable to: ‘I’ve had a great run; how do I protect that? How do I make sure that something doesn’t come out of left field and hurt me?’”

Rather than making wholesale shifts, many allocators are adjusting exposures at the margin, tilting toward regions, sectors and asset classes that are perceived to be more resilient to geopolitical disruption, trade fragmentation and inflation volatility.

Oliver Bardon, head of portfolio construction and risk at TIFF Investment Management, said separating the signal from the noise can be problematic.

“The challenge in this kind of environment is to distinguish transient risks that we have little edge in taking and that we should not allow to impact our core approach—uncompensated risks—from longer-term developments that should cause us to reassess our capital market assumptions and investment theses,” Bardon says.

Fiscal Policy

Strategists note that the evolution of fiscal policy has implications for risk management. Stephen Harvey, the CIO of and chief investment strategist at Sagard Wealth, says that from 2000 to 2020, monetary policy dominated markets, as government bond yields declined with consistency and central banks used rate cuts and quantitative easing to mitigate market stress and reassure jittery investors.

The regime was favorable to the traditional 60/40 stock/bond portfolio. During most of that period, Harvey says, bonds also maintained a negative correlation with equities, allowing both to provide expected returns and meaningful downside protection.

Since the COVID-19 pandemic, in contrast, Harvey says fiscal policy has become the dominant market force.

“The result [since 2020] has been a very different environment from the prior two decades. Government bonds have generated weak—and in some cases, negative—returns, while equities have continued to outperform,” Harvey says. “More importantly, bonds have shifted from being negatively correlated with equities to being positively correlated at key points in the cycle. That change has undermined their traditional role within the 60/40 portfolio, reducing their effectiveness as both a return generator and an equity-risk diversifier.”

Managing Risk and Exposure

Because of the increasing concentration risk of major public equity indexes, many investors are looking to actively managed strategies, particularly in markets where a narrow group of companies has driven an outsized share of returns, such as in the U.S. and in certain parts of Asia. As the companies grow, they dominate market-cap-weighted indexes, raising the possibility that passive equity exposure may be increasing risk, rather than providing market beta.

“Equity market structure today is dominated by the unprecedented concentration of returns in a very small number of stocks: over the last few years in the Mag[nificent] 7 and more recently in [artificial intelligence] infrastructure, especially the semiconductor space,” Bardon says. “Geopolitical headlines have been dominated by the Middle East, producing volatile, unpredictable and, for us, uncompensated risks which we have mitigated, for example, by managing to flat energy exposure and by shifting some equity exposure from direct holdings to options, maintaining market beta while mitigating downside volatility.”

Harvey adds that in the current market regime, income, flexibility and alternative risk premia should play a larger role in portfolios, and allocators should focus on diversifying their fixed-income portfolios.

To replace part of a traditional bond allocation with alternative sources of income for diversification purposes, Harvey recommends private credit and hedge funds, which can offer a bond-like return profile but with lower sensitivity to interest rates and less dependence on falling yields to generate returns.

“We believe the focus should be on rebuilding the defensive allocation, rather than simply relying on the traditional 40% bond sleeve to play the same role it did in the past,” Harvey says. “In a world where government bonds are more vulnerable to inflation, fiscal deficits and shifts in term premia, investors need to broaden their sources of income and diversification.”

Jason Vailliancourt, chief investment strategist at Columbia Threadneedle, adds that since stock-bond correlation has long been positive, duration can protect investors on the downside, a suggestion Harvey echoes.

“The key is not to abandon defensive assets altogether,” Harvey says. “Rather, it is to recognize that the composition of the defensive portfolio needs to evolve. In the prior regime, duration did much of the work. In the current regime, income, flexibility and alternative risk premia should play a larger role.