Diversification

Definition

Diversification reduces portfolio vulnerability by limiting reliance on any single asset, manager, sector, geography, or risk factor. It is not simply “owning many things”; it is owning exposures that behave differently under different market conditions. Effective diversification considers correlation, liquidity, concentration limits, and the allocator’s obligations. Allocator Context Institutional allocators diversify across asset classes (public and private), sub-strategies, and managers. They also manage diversification across vintages in private markets. Family offices may diversify less intentionally in pursuit of conviction or control, but still face concentration risk through illiquidity, operating exposure, or correlated holdings. Decision Authority Diversification rules are commonly specified in IPS documents and enforced through concentration limits and sleeve guidelines. Committees often intervene when portfolios become overly concentrated due to market moves, manager growth, or strategy drift. Why It Matters for Fundraising Allocators evaluate new managers in the context of portfolio diversification: does the strategy add differentiated exposure or does it duplicate existing risk? Managers who can explain correlation behavior, downside profile, and portfolio contribution are easier to approve. Key Takeaways Diversification reduces dependence on single exposures Correlation and stress behavior matter Institutional portfolios enforce diversification via policy Fundraising success depends on differentiated portfolio contribution