Concentration Risk

Allocator relevance: A primary portfolio risk driver that can amplify drawdowns and reduce diversification benefits, especially in illiquid portfolios.

Expanded Definition

Concentration risk arises when exposures cluster in ways that increase sensitivity to a single outcome. This can be intentional (high-conviction) or accidental (overlapping holdings across managers, correlated sector bets, or repeated factor exposure). In private markets, concentration is harder to unwind due to liquidity constraints and delayed pricing.

Allocators evaluate concentration at multiple layers: position-level, manager-level, strategy-level, and look-through exposure across underlying companies and sectors.

How It Works in Practice

Teams set concentration limits (by issuer, sector, geography, or manager), monitor exposures over time, and stress test the portfolio under adverse scenarios. In private portfolios, concentration management often relies on pacing, rebalancing via liquid sleeves, and controlling follow-on decisions.

Decision Authority and Governance

Governance requires clear risk limits, escalation thresholds, and periodic reporting to ensure concentration does not drift beyond intended levels. Investment committees typically approve exceptions and monitor cumulative exposure across strategies.

Common Misconceptions

• Diversification by manager eliminates concentration risk.
• Concentration is only about the number of positions.
• Private markets inherently diversify because they are “different.”

Key Takeaways

• Look-through exposure is often where concentration hides.
• Concentration matters most in stress environments.
• Limits and monitoring prevent silent drift.