📉 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, a 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?”

The core reason for diversification is to reduce risk (preferably during downturns in risky asset class like equities) in a portfolio and generate better risk-adjusted returns. 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 by 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.