Scenario Analysis

Definition

Scenario analysis is a structured method for evaluating outcomes under specific conditions. Scenarios can be historical (e.g., a prior crisis period) or hypothetical (e.g., “rates up 200 bps,” “credit spreads widen,” “equity down 25%”). The objective is not prediction; it is preparedness—understanding sensitivity and failure modes. Allocator Context Allocators use scenario analysis to test portfolio resilience and validate portfolio role. Institutional portfolios often incorporate scenarios into risk reviews, especially for strategies where historical time series are insufficient, such as private markets, niche credit, or complex hedge fund exposures. Decision Authority Scenario results are frequently included in committee materials. If a strategy appears fragile in scenarios that matter to the allocator (e.g., liquidity crunch, rate spike), allocations may be reduced or denied regardless of baseline return expectations. Why It Matters for Fundraising Managers who can speak clearly about scenario behavior—what helps, what hurts, and what mitigations exist—signal maturity. Overconfident claims that “we will do well in all environments” reduce trust. Allocators prefer managers who understand tradeoffs. Key Takeaways Tests sensitivity and failure modes, not forecasts Important for illiquid and complex strategies Helps validate portfolio role under stress Credibility comes from acknowledging tradeoffs