88% Of Global Fund Managers Are Rethinking Risk. Should You?

The best time to find weaknesses in a portfolio is before the next major market sell-off, not in the middle of one. Yet investors can go years without seeing how their allocations might hold up under extreme conditions. As uncertainty builds, fund managers are putting more effort into understanding what happens when markets don’t behave as expected.

A global study by Clearwater Analytics — which surveyed 250 senior executives and fund managers across the U.S., Europe and Asia-Pacific — found that 88% increased their spending on stress testing over the past year. Rising interest rates, tighter market liquidity and geopolitical uncertainty are prompting investment professionals to take a closer look at how portfolios could perform under extreme conditions.

The concern goes beyond market volatility. Asset managers are increasingly questioning whether traditional diversification can provide enough protection when markets sell off sharply. During periods of stress, correlations between asset classes can rise, meaning investments that typically move independently may begin falling together.

That has implications for portfolios built around the assumption that spreading investments across asset classes will help cushion losses. Diversification remains important, but it may not be enough on its own when markets experience a broad disruption.

The survey offers a glimpse into how managers are responding. Nearly half (49%) plan to use enhanced risk modeling or stress testing to identify potential vulnerabilities. Other questions and results showed that 54% said they intend to increase their focus on defensive stocks with strong balance sheets, and 56% said they plan to use put options to help limit losses during market declines.

Other strategies include volatility products, which 34% of respondents plan to use, and dedicated tail-risk funds, which 22% expect to allocate money toward over the next year.

For advisors, the takeaway isn’t necessarily to adopt these strategies or predict the next market shock. Instead, it’s an opportunity to revisit the assumptions behind a client’s portfolio.

How might their investments behave if stocks and bonds decline together? Would a prolonged drawdown force them to sell assets to cover spending needs? And does their current allocation reflect their actual tolerance for losses, or simply how they feel when markets are calm?

These conversations can help clients understand the difference between diversification and downside protection. A portfolio can be broadly diversified and still experience meaningful losses when markets become disorderly. Stress testing those scenarios before a downturn occurs can help advisors identify potential weaknesses, set more realistic expectations and make adjustments while clients have more options.

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