Editorial staff
The market environment of the past few years has exposed the limitations of that approach. Episodes in which equities and core government bonds declined in tandem, sharp dislocations driven more by liquidity stress than fundamentals, and the rapid transition from near-zero interest rates to structurally higher levels have all demonstrated that diversification by label is no longer sufficient.
International investor and strategist Alexander Kopylkov summarises the issue succinctly:
“A portfolio with many line items is not necessarily diversified. If most holdings are impaired by the same macro shock, the risk was concentrated all along – it just was not recognised.”
In 2025, professional investors are therefore reframing diversification in more rigorous terms, focusing less on the number of positions and more on the underlying drivers of loss and return.
From Asset Categories to Underlying Risk Factors
The first change is conceptual. Instead of viewing portfolios primarily through the lens of asset categories: equities, bonds, alternatives, institutions are mapping exposures to fundamental risk factors:
- sensitivity to global growth and recession,
- exposure to inflation and real interest rates,
- dependence on specific currencies, commodities or regulatory regimes,
- vulnerability to shifts in liquidity and risk appetite.
Under this framework, it becomes apparent that many ostensibly diversified portfolios are heavily exposed to a small set of macro conditions. A global growth equity mandate, a late-stage private equity allocation and a technology-focused small-cap portfolio may be managed by different firms and reported in different “buckets”, yet all can be driven by the same combination of low discount rates, robust growth and easy financing.
Conversely, assets that appear unrelated on the surface, inflation-linked sovereigns, regulated infrastructure concessions, or high-quality dividend payers in non-cyclical sectors, may provide genuinely differentiated behaviour under stress, provided their valuation and regulatory risk are properly assessed.
Alexander Kopylkov notes that this factor-based thinking now extends to private markets:
“When we analyse private equity and venture positions, we map them to the same macro and liquidity factors we use for listed assets. If every strategy relies on cheap capital and open exit markets, that is a concentration of risk, not diversification.”
The Repositioning of “Safe” Assets
The second adjustment concerns instruments that were long treated as inherently defensive: cash, bonds and so-called defensive equities.
Cash and short-term instruments have reasserted their importance as policy rates have risen. They now offer a visible yield and serve three distinct purposes: a buffer against forced sales, a source of optionality in dislocations, and a modest income stream. At the same time, reinvestment risk has re-emerged. Many institutions, therefore, now structure liquidity as a ladder of short maturities rather than a static cash balance.
Fixed income is undergoing a similar reclassification. The assumption that bonds reliably hedge equity risk has been undermined by periods of positive correlation between the two. Duration, credit quality and jurisdiction are now analysed separately. Long-dated sovereign bonds are recognised as highly sensitive to rate moves; high-yield credit is treated as equity-like in downturns; and investment-grade credit from credible issuers is used selectively as a stabiliser, but only where inflation and policy frameworks support that role.
Defensive equities and real assets are also being assessed with greater precision. Companies in sectors such as consumer staples, healthcare and utilities still play an important role in dampening volatility, yet they are no longer assumed to be attractively priced by default. Real assets, including infrastructure and certain segments of real estate, are increasingly used to introduce contractual or regulated cash flows into portfolios, but with explicit attention to political and regulatory risk.
Liquidity, Time Horizon and Hidden Concentration
The third area of reassessment is liquidity. The significant increase in allocations to private equity, private credit, real assets and venture capital has introduced an additional dimension of risk: the ability to adjust positions when conditions change.
A portfolio that combines listed equities, leveraged buyout funds and late-stage growth investments can appear diversified, yet still depend on the same underlying conditions: healthy IPO markets, active mergers and acquisitions, and stable credit spreads. When those conditions deteriorate simultaneously, the true flexibility of the portfolio may prove lower than anticipated.
This dynamic is closely related to concerns Alexander Kopylkov has raised in other contexts, including his critique of early-stage structures that assume a narrow set of exit options. Concentration in financing and exit pathways, even across superficially different assets, can meaningfully increase fragility.
In response, many institutional investors now view portfolios in liquidity layers. A liquid layer of cash and short-duration instruments is designed to meet obligations and provide tactical flexibility. A core liquid layer of global equities and bonds reflects long-term strategic views. An illiquid layer of private equity, real assets and venture capital is sized so that commitments do not force asset sales elsewhere in adverse scenarios.
Crucially, governance processes are being aligned with explicit time horizons. Decisions on long-term assets are less influenced by day-to-day news flow, while liquid sleeves are managed with a clear understanding of their role in cushioning volatility and facilitating rebalancing.
Towards a More Precise Definition of Diversification
In this environment, genuine diversification is becoming less a matter of simple allocation formulas and more a matter of engineering. Portfolios that are likely to prove resilient share several characteristics:
- risks are identified and grouped by underlying drivers, rather than by product label;
- correlations are considered across plausible macro scenarios, not inferred solely from historical averages;
- liquidity profiles are matched deliberately to liabilities and governance structures;
- and illiquid, higher-return strategies are built upon a robust, transparent liquid core.
As Alexander Kopylkov observes, the constraint today is rarely the availability of instruments. The constraint is clarity. Counting positions is straightforward; understanding how and why they might move together under stress is more demanding. In 2025, it is this deeper understanding, rather than the appearance of variety, that marks the difference between portfolios that are merely complex and those that are genuinely diversified.
Editorial staff
