📉 How the Traditional View: “Diversify Across Asset Classes to reduce portfolio risk” is incomplete diversification

While diversification has some merits, most traditional portfolios (like the classic 60/40 mix) rely on beta exposure — passive exposure to market risk. They are not strategies, they are allocations. And without dynamic risk management, even a well-diversified beta portfolio can suffer large drawdowns when markets move together, as they often do in crises.

🎯 The Right Question: “How Much Should I Allocate to the Most Efficient Strategy?”

Let’s shift perspective. If a strategy is:

• Actively risk-managed.

• Demonstrated to deliver higher risk-adjusted returns (e.g., Sharpe ratio, Sortino ratio, maximum drawdown control).

• Able to adapt across market regimes and preserve capital in downturns.

Then the real question becomes:

"Why wouldn't I allocate more to that strategy, even if it's concentrated in one asset class?"

In this framing, strategy matters more than asset class, and risk-adjusted return matters more than raw return.

📈 What Is Risk-Adjusted Return?

Risk-adjusted return is a measure of how much return you earn for every unit of risk you take. The most common metrics include:

• Sharpe Ratio: Excess return per unit of volatility (total risk)

• Sortino Ratio: Excess return per unit of downside risk (only counts losses)

• Maximum Drawdown: Largest historical peak-to-trough decline

• Ulcer Index / Calmar Ratio: Other downside-focused metrics

These are critical tools for evaluating whether a strategy is efficient. Why?

Because two portfolios with the same return can carry vastly different risks. One may grind slowly upward with minimal turbulence; another may whip up and down and leave you exposed to large losses.

✅ Why Risk-Adjusted Metrics Matter More Than Return Alone

Let’s look at two strategies:

Traditional Portfolio:

• Annual Return: 11%

• Max Drawdown: -25%

• Sharpe Ratio: 0.60

• Sortino Ratio: 0.90

Risk-managed Strategy:

• Annual Return: 9%

• Max Drawdown: -10%

• Sharpe Ratio: 1.30

• Sortino Ratio: 1.60

Even if the absolute return is higher for traditional portfolio, the risk-managed strategy clearly offers better capital efficiency — achieving consistent returns with significantly less risk and drawdown.

This is the reason sophisticated investors are allocating capital not just across asset types — but across strategies with the highest risk-adjusted return.

🔁 Why Asset-Based Diversification Isn’t Always the Answer

Many investors falsely believe that adding bonds, dividend funds, or international equity reduces risk. But this only works if:

• The added assets are uncorrelated, and

• The combination leads to better overall risk-adjusted return

In practice, adding low-yield bonds or highly correlated global equity often waters down portfolio efficiency without reducing real risk meaningfully.

Instead, if one strategy (like Alamut Capital’s) provides better Sharpe/Sortino ratios, it may make sense to allocate more heavily to it — even if it's within a narrower asset class — because it offers:

✅ Smarter risk control

✅ Smoother compounding

✅ Protection during market stress

🧠 Key Insight: Strategy-Driven Allocation Beats Asset-Type Bucketing

"Smart concentration is often safer than dumb diversification."

Investing based on the quality of risk-adjusted returns — not the label on the asset class — is the more intelligent, evidence-based path forward.

Traditional diversification dilutes returns and risk together. Strategy-driven allocation selectively concentrates where the risk is better managed and the reward is more efficiently earned.

💡 How Alamut Capital Approaches This Differently

Our strategies are designed around the core principle of capital efficiency. That means:

• We use systematic, quantitative models that actively adjust exposure based on risk signals

• We aim to limit downside, not just chase upside

• We strive for high Sharpe and Sortino ratios — even after our fees

• We do not rely on static allocation between asset types, but on adaptive strategy allocation

As a result, our portfolios often offer better risk-adjusted performance than traditional index funds or balanced portfolios — which allows investors to allocate a greater share of their portfolio to our strategies with confidence.

⚖️ Example for a Client:

Let’s say a traditional advisor tells you:

“You should only allocate 60% to equities and 40% to bonds, because equities are risky.”

But what if we could show that our strategy:

• Delivers equity-like or better returns and does so after fees

• With half the volatility and drawdowns

Wouldn’t it make more sense to allocate 80–90% to that, and keep some liquidity for flexibility?

That’s not risky. That’s just smarter use of your capital.

📢 The Takeaway

Don’t ask:

“How should I split between stocks and bonds?”

Instead ask:

“Which strategies give me the best return per unit of risk — and how much should I allocate there?”

🚀 At Alamut Capital, we focus not just on returns — but on delivering those returns with precision, control, and efficiency.

Let us show you how risk-adjusted strategies can redefine your long-term success.