Functional Investing: The New Investing Playbook

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• The traditional 60/40 portfolio model is breaking down due to persistent inflation, rising stock-bond correlations, and growing geopolitical instability.
• Forward-thinking investors are adopting a total portfolio approach, grouping assets by function rather than by label.
• This function-based framework allows for more adaptive, resilient portfolios that reflect real behavior in shifting market regimes rather than outdated classifications.

For decades, investing was governed by a simple logic: own a mix of stocks and bonds, and let diversification do the heavy lifting. When stocks struggled, bonds provided ballast. And as rates fell consistently for 4 decades, bonds rallied accordingly. Most importantly, inflation stayed in its cage.

But that model, the classic 60/40, is built on assumptions that no longer hold. Today, inflation is sticky, correlations between stocks and bonds are positive, and geopolitical risk isn’t a headline; it’s a structural feature of the landscape.

As markets shift, the smartest investors aren’t just rebalancing their portfolios. They’re rethinking the entire blueprint, not tweaking around the edges, but questioning the foundation.

Stop Thinking in Buckets, Start Thinking in Functions

The problem with traditional portfolio construction isn’t just outdated assumptions. It’s the outdated architecture. Asset allocation still relies on rigid silos: public equities, fixed income, “alternatives.” But the real question isn’t whether something is private or public. It’s what purpose it serves.

Cian Walsh, head of hedge funds and private debt at Formue, one of the largest Nordic wealth managers, frames it this way: a portfolio should be built by function. He says equities are your growth engine, and credit is about income and loss avoidance. Everything else is a diversifier. That’s how he groups exposures, not by asset label.

In this model, a hedge fund isn’t just an “alternative.” It’s either equity-like or credit-like, or a volatility buffer that behaves unlike either. Private credit isn’t just a yield strategy. It’s a commitment, one with limited liquidity and long-term horizons. Gold might not generate income, but it can preserve optionality when nothing else does.

Why the Total Portfolio Approach Is Gaining Ground

The term “total portfolio approach” sounds academic. In practice, it’s radically pragmatic. It means treating every asset, public or private, long or short, liquid or locked, as part of the same risk system. It’s a philosophy that rejects hard lines between asset classes and instead asks: how do all the moving pieces interact? Where are the real correlations? What is actually diversifying what?

That’s important because one of the dirty secrets of the past decade is that many portfolios aren’t diversified at all. They’re just equity beta, sliced differently. Private equity. Growth stocks. VC. High-yield credit. All of them swim in the same current when markets stress.

In contrast, Walsh’s team separates their exposures into three core roles:

• Growth (public and private equities)
• Income (credit, private debt)
• Diversifiers (hedge funds, trend, macro, real assets)

Instead of assuming that “alternatives” are uncorrelated, they ask what role each investment actually plays. That clarity allows for real flexibility and better risk management.

How to Allocate When Nothing Is Safe

What happens when even your safe assets aren’t safe?

In 2022, bonds didn’t hedge anything. Instead, they joined equities in the drawdown. Duration wasn’t a shock absorber. It was a source of pain. That dynamic forced allocators to look elsewhere for protection.

For Walsh, that’s where true diversifiers come in, especially hedge funds. But not all hedge funds are created equal.

Some are “growth-ish,” like long/short equity funds. Others are “credit-ish,” like structured credit or long-biased distressed strategies. Then there are the real diversifiers: macro, trend, and systematic strategies that behave independently of traditional markets.

The key is sizing and expectations. Walsh knows trend-following has struggled in the past 18 months. But he’s not pulling the plug. “You tend to give up, and in that exact moment, the strategy often turns. That’s why you can’t abandon it mid-cycle,” he says.

Instead of chasing past performance, he evaluates managers on mid-cycle time horizons (3–5 years), tracks their rolling returns, and keeps capital with those who’ve stayed true to their process, even in rough patches.

Staying or Switching: How to Decide on Managers

Manager selection is more behavioral than analytical. Poor performance alone isn’t a red flag. But style drift is.

Walsh breaks down a typical hedge fund “S-curve”: high risk in the early months, strong alpha in years 2–5, and a potential plateau, or decline, if the manager becomes complacent or overly risk-averse. He avoids lifetime attachments. Hedge fund allocations aren’t tattoos, they’re tools, and each one has a half-life.

But exiting comes with tradeoffs. If a manager is under their high-water mark, switching means paying full fees to a new fund while the old one still has embedded optionality.

His team weighs: Has the strategy drifted? Is the underperformance explainable? What’s the fee math if we switch? Is there a differentiated exposure we’re missing? If the answers align, they’ll rotate. If not, they’ll stay patient.

Private Credit Is Booming. That Doesn’t Mean It’s Easy.

Private credit has exploded in recent years, and for good reason. With banks retrenching, private lenders are filling the gap, earning healthy yields and dictating terms.

But this is no passive play. Walsh treats private credit with the same rigor he applies to hedge funds. It’s about structural integrity, not only returns.

The challenge is that once you commit to a drawdown fund or an evergreen credit vehicle, you’re in, for years. With a hedge fund, you’ve essentially got equity-like optionality. You can exit when you want. Private credit, by contrast, is a capital preservation tool. You're avoiding losses, you lock in yield, and liquidity is more limited.”

Walsh’s team looks closely at manager alignment, origination quality, and downside controls. They think about how liquidity matches up with investor behavior. And they build semi-liquid portfolios that balance income, amortization, and redemption gates.

Private credit isn’t a hedge. It’s a yield engine. But like any engine, it needs routine maintenance and a plan for when it breaks down

This Isn’t Tactical. It’s Strategic Adaptation

Some might call this dynamic asset allocation. But that implies market timing. What Walsh is doing is more structural. He’s building for a world where regime shifts are the norm, not the exception.

That means you don’t expect bonds to save you, you don’t trust private equity to zig when stocks zag, and you don’t bucket assets by name. You group them by purpose.

It also means leaning into dispersion: owning uncorrelated return streams that behave differently in different market environments. Sometimes that’s macro, sometimes that’s credit, sometimes it’s simply the absence of correlation that saves you.

The Bottom Line

Amid all this constant noise, the hardest thing to do is think clearly. And that’s what the best allocators are doing right now. They’re not trying to be clever. They’re trying to be honest, about what portfolios are built to do, about where the risks are hiding, and about which beliefs no longer hold.

The 60/40 portfolio made sense in a world of falling rates and low inflation. That world is gone. What replaces it will look different for every investor. But the starting point is the same: build portfolios by function, not fiction. Measure risk by behavior, not labels. And be ready to evolve, because the market already has.

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This is based on an episode of Top Traders Unplugged, a bi-weekly podcast with the most interesting and experienced investors, economists, traders and thought leaders in the world. Sign up for our Newsletter or subscribe on your preferred podcast platform so that you don't miss out on future episodes.