Fund allocation and diversification
The Foundation of Portfolio Construction
Proper fund allocation balances growth potential with risk management through strategic diversification across assets and strategies.
Core Allocation Principles
1. Capital Segmentation
- Core Holdings (60-70%): Long-term investments
- Trading Capital (20-30%): Active positions
- Cash Reserve (10-20%): Dry powder for opportunities
2. Asset Class Diversification
| Asset Class | Suggested Allocation | Purpose |
|---|---|---|
| Equities | 40-60% | Growth |
| Fixed Income | 20-40% | Stability |
| Alternatives | 10-20% | Diversification |
| Cash | 5-10% | Liquidity |
Strategic Diversification Methods
1. Geographic Diversification
- Domestic markets (50-70%)
- Developed international (20-30%)
- Emerging markets (10-20%)
2. Sector Rotation
- Limit single sector exposure to 15-20%
- Balance cyclical and defensive sectors
- Adjust weights based on economic cycles
3. Timeframe Diversification
- Short-term trades (10-20%)
- Medium-term positions (30-40%)
- Long-term holdings (40-60%)
QuantWave Implementation Framework
Portfolio Construction Rules
- Maximum 5% in single position
- Maximum 20% in single sector
- Correlation threshold of 0.7 between positions
- Volatility-adjusted position sizing
Diversification Metrics
- Portfolio beta calculation
- Correlation matrix analysis
- Drawdown simulation
- Stress testing across scenarios
Common Mistakes
- Over-diversification (diworsification)
- Underestimating correlation in crises
- Chasing past performance
- Ignoring liquidity constraints
Rebalancing Protocol
- Quarterly portfolio review
- 5% threshold for rebalancing triggers
- Tax-efficient reallocation
- Volatility-adjusted bands
Effective fund allocation and diversification create resilient portfolios that can weather market cycles. By combining strategic asset allocation with QuantWave's correlation analytics, investors achieve optimal balance between risk and return.