Reminisc on Resilience: What the Best Asset Managers Do Differently in a Downturn

Market downturns are inevitable. Yet, while some asset managers see their strategies crumble under pressure, others emerge stronger, often gaining market share and client trust. What differentiates these resilient firms? This guide, prepared for the audience of Reminisc, explores the qualitative benchmarks and industry trends that define best-in-class asset management during periods of stress. Drawing on anonymized experiences and widely shared professional practices, we offer a framework for building a truly resilient investment practice.

As of May 2026, the financial landscape continues to be shaped by rapid shifts in monetary policy, geopolitical tensions, and technological disruption. In this environment, resilience is not just about capital preservation; it is about adaptability, transparency, and a deep understanding of one's own risk biases. This article is intended for general informational purposes only and does not constitute professional investment advice. Readers should consult a qualified financial advisor for decisions specific to their circumstances.

Understanding the Stakes: Why Most Managers Falter in Downturns

The first step toward resilience is acknowledging the common patterns that lead to failure. Many asset managers, even those with stellar long-term records, struggle during downturns because of deeply ingrained behavioral and structural weaknesses. These include overconfidence in forecasting, a herd mentality that leads to crowded trades, and incentive structures that reward short-term performance over long-term stability. The stakes are high: a single severe drawdown can wipe out years of gains and erode client confidence beyond repair.

The Behavioral Biases That Undermine Decision-Making

Behavioral finance research has identified several cognitive biases that become particularly dangerous during market stress. Loss aversion, for instance, causes managers to hold onto losing positions too long, hoping for a rebound, while disposition effect leads them to sell winners too early to lock in gains. Confirmation bias reinforces existing views, making it hard to incorporate contradictory data. One composite example involves a mid-sized hedge fund that, during a market correction in 2022, continued to add to its technology holdings because the lead portfolio manager was convinced the sell-off was temporary. The fund lost over 30% before finally cutting positions, a loss that could have been mitigated with a more disciplined risk framework.

Structural Pitfalls in Traditional Asset Management

Beyond individual biases, organizational structures often amplify risk. Many firms tie compensation to annual performance, incentivizing managers to take excessive risks in good times to earn bonuses, while discouraging the building of cash reserves or hedging positions that might dampen returns. Additionally, the pressure to remain fully invested to avoid underperformance relative to benchmarks can lead to a lack of flexibility. A well-known challenge is the 'liquidity mismatch' where funds promise daily redemptions but hold illiquid assets—a recipe for forced selling at the worst possible prices. In one anonymized case, a real estate fund faced a 20% redemption request during a liquidity crunch; its inability to sell properties quickly led to a fire sale that damaged long-term returns and investor trust.

Regulatory and Market Shifts

Regulatory changes can also catch managers off guard. For example, new margin requirements or changes in capital treatment for certain asset classes can force portfolio adjustments at inopportune times. The best managers stay ahead of these shifts by maintaining a proactive dialogue with compliance teams and regulators. They also stress-test their portfolios against a range of scenarios, including regulatory changes, to ensure they can adapt quickly.

In summary, understanding these stakes is crucial. The resilient manager does not ignore the possibility of downturn—they prepare for it. They build systems and cultures that counteract biases, align incentives with long-term outcomes, and maintain operational flexibility. This foundational awareness sets the stage for the frameworks and practices we explore next.

Core Frameworks: Building a Resilient Investment Philosophy

Resilience in asset management is not a single tactic but a coherent philosophy that permeates every aspect of the firm. The best managers adopt frameworks that prioritize capital preservation, adaptability, and a long-term horizon, even when short-term markets are volatile. These frameworks are built on principles of dynamic asset allocation, robust risk management, and a culture that encourages dissent and continuous learning.

Dynamic Asset Allocation: Beyond Buy-and-Hold

Traditional strategic asset allocation involves setting a fixed target mix of stocks, bonds, and other assets, then rebalancing periodically. While this approach works in stable markets, it can be disastrous during downturns if the manager blindly rebalances into falling markets. Dynamic asset allocation, by contrast, adjusts the portfolio mix based on changing market conditions, valuations, and risk indicators. For example, a manager might reduce equity exposure when valuation metrics like the CAPE ratio are elevated, or increase cash reserves when volatility indices spike. This approach requires a disciplined framework for making these adjustments, such as a set of predefined triggers based on moving averages, volatility regimes, or macroeconomic indicators. One composite scenario involves a multi-asset fund that uses a trend-following overlay: when the 200-day moving average of the S&P 500 breaks below a certain threshold, the fund automatically reduces equity exposure by 20%. This mechanical rule helped the fund avoid significant losses during the COVID-19 sell-off in March 2020, while still participating in the subsequent recovery.

Risk Parity and Tail Risk Hedging

Another framework gaining traction is risk parity, which allocates capital based on risk contribution rather than dollar amounts. The goal is to balance risk across asset classes so that no single source dominates portfolio volatility. During downturns, this can help because bonds often rally when equities fall, providing a natural hedge. However, risk parity is not foolproof—during periods of rising rates and falling equities (like 2022), both assets can decline simultaneously. To address this, resilient managers often add tail risk hedging strategies, such as buying put options on equity indexes or using volatility derivatives. While these hedges have a cost that drags on returns in calm markets, they can pay off handsomely during crises. For instance, a pension fund that allocates 2% of its portfolio to a tail risk strategy might lose that 2% in most years but gain 20-30% during a market crash, offsetting losses elsewhere. The key is to view hedges as insurance, not as a source of return.

Scenario Planning and Stress Testing

The most resilient firms do not rely on a single forecast. Instead, they develop multiple plausible scenarios—ranging from a soft landing to a deep recession to a stagflationary environment—and stress-test their portfolios against each. This process forces managers to think about how their positions would perform under different conditions and identify potential vulnerabilities. For example, a global macro fund might simulate a scenario where the US dollar weakens sharply while inflation remains high, and then assess which holdings would suffer. This leads to pre-emptive adjustments, such as reducing exposure to emerging market debt that is sensitive to dollar strength. The discipline of scenario planning also helps teams avoid groupthink by encouraging diverse perspectives.

Ultimately, these frameworks are not about predicting the future but about building a portfolio that can withstand a range of outcomes. They require a willingness to deviate from benchmarks, accept tracking error, and explain these decisions to clients. The next section details how to execute these frameworks in practice.

Execution: Turning Frameworks into Repeatable Processes

Having a resilient philosophy is one thing; executing it consistently under pressure is another. The best asset managers translate their frameworks into repeatable processes that are well-documented, automated where possible, and ingrained in the firm's culture. This section outlines the key execution steps, from portfolio construction to ongoing monitoring and rebalancing.

Step 1: Establish Clear Risk Budgets

Every portfolio should have a risk budget—a predefined limit on how much volatility or drawdown the manager is willing to accept over a given period. This budget is set in consultation with clients and is aligned with their long-term goals. For example, a pension fund with a 30-year horizon might tolerate a 20% drawdown, while a high-net-worth individual nearing retirement might accept only 10%. The risk budget then drives asset allocation: if the budget is 15% volatility, the manager allocates to assets that collectively stay within that limit. During a downturn, the manager may reduce risk by shifting to lower-volatility assets or increasing cash, but always within the agreed framework. This transparency helps clients understand why certain decisions are made, reducing panic during volatile periods.

Step 2: Implement Disciplined Rebalancing Rules

Rebalancing is critical during downturns, but the approach must be calibrated to the market environment. Many managers use calendar-based rebalancing (e.g., quarterly), but resilient managers often combine this with threshold-based triggers. For instance, if an asset class deviates by more than 5% from its target, the portfolio is rebalanced back to target. This rule ensures that the manager does not overreact to short-term noise but also prevents drift from becoming too extreme. During a sharp sell-off, threshold rebalancing can force the manager to buy assets that have become undervalued, a classic contrarian move. However, this requires the manager to have available cash or to sell other assets, which may be difficult if all assets are declining. To address this, some funds maintain a 'dry powder' allocation of 5-10% in cash or short-term bonds specifically for opportunistic rebalancing.

Step 3: Use a Watchlist and Decision Triggers

Resilient managers maintain a watchlist of key market indicators that signal when a more aggressive response is needed. These triggers can include VIX levels, credit spreads, yield curve inversions, or specific macro data points like unemployment claims. When a trigger is breached, a predefined action plan is activated. For instance, if credit spreads widen by 100 basis points, the manager might automatically reduce high-yield bond exposure by 20%. This removes emotion from the decision and ensures a timely response. The watchlist is reviewed quarterly and updated as market conditions evolve. One composite example involves a fixed-income fund that had a trigger for when the 2-year/10-year Treasury yield curve inverted by more than 50 basis points. When this occurred in early 2023, the fund reduced duration and increased cash, which protected it from the subsequent rate hikes that caused losses in longer-dated bonds.

Step 4: Foster a Culture of Constructive Dissent

Execution is not just about systems; it is also about people. The best firms create an environment where team members feel safe to challenge the consensus. This can be formalized through 'red team' exercises, where a subgroup is tasked with arguing against the current portfolio positioning. Alternatively, some firms use a 'devil's advocate' role in investment meetings. This culture helps catch errors before they become costly. For example, at a large asset manager, a junior analyst flagged that the firm's exposure to a particular emerging market was too high given political risks. The senior team initially dismissed the concern, but the firm's policy required a formal debate. After hearing the analysis, they reduced exposure by half, just weeks before a currency crisis hit that country. This anecdote underscores that resilience is built through culture, not just algorithms.

In essence, execution is about making the right decisions at the right time, consistently. The processes described here provide a roadmap, but they require discipline and a willingness to sometimes be wrong. The next section explores the tools and technology that support these processes.

Tools and Technology: Enabling Real-Time Decision-Making

Modern asset management relies heavily on technology to implement resilient strategies. From portfolio management systems to risk analytics platforms, the right tools can mean the difference between timely action and missed opportunities. However, technology is only as good as the data and processes behind it. This section covers the essential tools, their economics, and the maintenance realities that firms must consider.

Portfolio Management Systems (PMS)

A robust PMS is the backbone of any asset manager. It should provide real-time visibility into positions, exposures, and performance across all asset classes and accounts. Key features include the ability to run scenario analyses, stress tests, and what-if simulations. For example, a PMS might allow a manager to see the impact of a 10% equity market drop on each client portfolio in seconds. Many modern systems also offer automated rebalancing and compliance checks, ensuring that trades adhere to client mandates and regulatory limits. The cost of a PMS varies widely, from open-source solutions that require significant customization to enterprise platforms costing hundreds of thousands of dollars annually. For small to mid-sized firms, cloud-based solutions like those offered by BlackRock's Aladdin or SS&C's Advent provide a good balance of functionality and cost. However, the implementation and ongoing maintenance require dedicated IT staff or external consultants, which is often underestimated.

Risk Analytics Platforms

Beyond the PMS, specialized risk analytics platforms give deeper insights into portfolio vulnerabilities. These tools calculate value-at-risk (VaR), expected shortfall, and other risk metrics, often using Monte Carlo simulations. They can also perform factor-based analysis to decompose returns and identify hidden risk exposures. For instance, a manager might discover that their supposedly diversified portfolio has a high loading on the momentum factor, which could lead to losses during factor reversals. Leading platforms include MSCI RiskMetrics, Bloomberg PORT, and Axioma. The cost can be significant—often $50,000 to $200,000 per year per license—but for firms managing large assets, it is a necessary investment. Smaller firms may opt for more affordable options like Finastra or use Excel-based tools with add-ins, though these lack the sophistication of dedicated platforms.

Data Feeds and Market Data

Accurate and timely data is critical for risk management and decision-making. Most firms subscribe to multiple data feeds, including market prices, corporate actions, and macroeconomic data. The cost of market data can be substantial, with Bloomberg terminals costing around $24,000 per year each, plus additional fees for specific datasets. Many firms now supplement traditional feeds with alternative data, such as satellite imagery or credit card transaction data, to gain an edge. However, integrating alternative data requires robust data management and analytics capabilities. One composite example involves a hedge fund that used shipping data to predict inventory levels at major retailers, giving them an early signal of demand changes. This data advantage allowed them to adjust positions before earnings announcements, but the cost of acquiring and processing the data was significant, and the team needed data scientists to make sense of it.

Automation and AI

Increasingly, asset managers are using automation and artificial intelligence to enhance decision-making. Machine learning algorithms can detect patterns in market data that humans might miss, such as early signals of a market turn. For example, natural language processing (NLP) can analyze central bank statements and news articles to gauge sentiment, which can be fed into a trading model. However, these tools are not a panacea. They require careful training, validation, and oversight to avoid overfitting and model drift. The best firms use AI as a decision support tool, not a replacement for human judgment. They also ensure that the models are explainable, so that managers understand why the AI is making a particular recommendation. This transparency is crucial for maintaining trust with clients and regulators.

In summary, the right tools enable resilience by providing timely data, robust analytics, and automation. However, they come with significant costs and require ongoing maintenance. Firms must carefully evaluate their needs and budget, and ensure they have the expertise to use these tools effectively. The next section explores how resilient managers grow their business even during downturns.

Growth Mechanics: Thriving Through Market Stress

While many firms contract during downturns, the best asset managers use these periods to strengthen their market position. They understand that resilience is not just about survival—it is about seizing opportunities that arise from the dislocation. This section explores the growth mechanics that enable firms to attract clients, retain talent, and build long-term value even in adverse conditions.

Client Communication and Trust-Building

In a downturn, clients are anxious and seek reassurance. The best managers proactively communicate with clients, explaining the strategy, the rationale for current positioning, and what they are doing to navigate the environment. This communication should be honest, acknowledging uncertainty but also highlighting the firm's preparedness. For example, a wealth manager might send weekly market updates to clients during a volatile period, including a personal note from the CIO. This transparency builds trust and reduces the likelihood of clients redeeming at the worst time. One composite example involves a multi-family office that, during the 2020 sell-off, held virtual town halls for clients, explaining the portfolio's defensive positioning and the steps being taken to take advantage of bargains. As a result, the firm saw net inflows during the quarter, while many competitors experienced outflows.

Counter-Cyclical Hiring and Talent Retention

Downturns often lead to layoffs across the industry, which means top talent becomes available. Resilient firms use this as an opportunity to hire skilled professionals who might otherwise be unattainable. They also focus on retaining their own talent by reinforcing the firm's mission and offering non-monetary benefits like flexible work arrangements or professional development. The cost of losing a key portfolio manager during a downturn can be high, as it disrupts client relationships and investment processes. Firms that maintain a strong culture and invest in their people are better positioned to retain talent when times are tough. For instance, a boutique asset manager used the 2022 market correction to hire a senior risk manager from a larger bank that was downsizing, strengthening its risk framework for the future.

Product Development and Innovation

Market stress often reveals gaps in existing product offerings. Resilient firms innovate by developing new strategies that address current client needs. For example, during a period of high inflation and rising rates, a manager might launch a real assets fund that invests in commodities, infrastructure, and natural resources. Alternatively, they might create a liquid alternative strategy that provides downside protection while offering upside participation. These products can attract new clients who are dissatisfied with traditional offerings. However, product development requires careful research, and the firm must ensure that the new product aligns with its core competencies. A successful example is a firm that launched a managed volatility equity ETF during the 2020 downturn, which attracted assets from investors seeking lower-risk equity exposure. The product was based on the firm's existing research on low-volatility strategies, so it was a natural extension.

Leveraging Technology for Scalability

Technology also plays a role in growth. During downturns, firms can invest in digital tools that improve client experience and operational efficiency. For instance, a client portal that provides real-time performance reporting and interactive dashboards can differentiate a firm from competitors. Similarly, automating back-office processes frees up staff to focus on client service and investment research. The initial investment may be significant, but the long-term payoff in client retention and scalability is substantial. One composite scenario involves a mid-sized RIA that implemented a CRM system integrated with its portfolio management platform, allowing advisors to see all client interactions and holdings in one place. This improved service quality and helped the firm win new clients through referrals.

In essence, downturns are not a time to go into hiding; they are a time to be proactive. By communicating effectively, hiring strategically, innovating, and leveraging technology, resilient managers turn adversity into advantage. The next section addresses the risks and pitfalls that can derail even the best-laid plans.

Risks and Pitfalls: Common Mistakes and How to Avoid Them

Even with the best frameworks and tools, asset managers can fall into traps that undermine resilience. This section identifies the most common mistakes made during downturns and offers practical mitigations. Being aware of these pitfalls is the first step to avoiding them.

Overconfidence in Market Timing

One of the most dangerous mistakes is believing you can predict the bottom or the timing of a recovery. Managers who try to time the market often end up selling at the worst time (near the bottom) and buying back too late. This can be driven by recency bias—expecting recent trends to continue—or by anchoring to previous price levels. Mitigation: Instead of trying to time the market, use a disciplined rebalancing and risk-budgeting approach. Set rules for when to reduce or increase exposure based on objective triggers, not emotions. For example, a manager might have a rule to increase equity allocation by 5% if the market drops 20% from its high, regardless of whether they think the bottom is in. This mechanical approach avoids the pitfalls of market timing.

Ignoring Liquidity Risk

Another common pitfall is underestimating liquidity risk. During a downturn, liquidity can evaporate quickly, making it difficult to sell positions without incurring large losses. This is particularly dangerous for funds that offer daily liquidity but hold illiquid assets. Mitigation: Conduct regular liquidity stress tests that assume extreme market conditions. Maintain a liquidity buffer of highly liquid assets, such as short-term Treasuries, and limit the size of illiquid positions. Also, ensure that redemption terms are aligned with asset liquidity. For example, a fund holding private credit should have quarterly or longer redemption terms, not daily.

Letting Tax Concerns Drive Decisions

Some managers hold onto losing positions to avoid realizing losses, or they delay selling winners to defer capital gains taxes. While tax efficiency is important, it should not override prudent risk management. In a downturn, a large drawdown can more than offset any tax benefits. Mitigation: Separate tax management from portfolio risk management. Use tax-loss harvesting strategies to offset gains, but do not let tax considerations prevent you from cutting a position that has deteriorated fundamentally. For example, if a stock has fallen 30% and the outlook is poor, selling it to realize the loss is often better than holding and risking further decline.

Failing to Update the Investment Thesis

When markets change, the assumptions behind an investment thesis may no longer hold. Yet many managers stick with their original thesis due to confirmation bias or ego. This leads to holding positions that are no longer justified. Mitigation: Establish a formal review process for every position, especially during downturns. Ask: 'If I did not own this today, would I buy it?' If the answer is no, it should be sold. Also, encourage team members to challenge each other's theses. One composite example involves a growth equity fund that held a tech stock that had fallen 50% during a rate-hiking cycle. The lead analyst argued that the company's fundamentals were still strong, but a junior analyst pointed out that the company's debt would become unmanageable at higher rates. After debate, the fund sold the position, avoiding further losses when the company later defaulted.

Neglecting Operational Resilience

Finally, many firms focus only on investment resilience while ignoring operational risks. A cyberattack, a key person leaving, or a system failure can be just as damaging as a market downturn. Mitigation: Develop a business continuity plan that covers remote work, data backups, and succession planning. Regularly test these plans. For example, conduct a simulated cyberattack exercise to see how the team responds. Ensure that no single person is indispensable by cross-training staff and documenting processes.

By being aware of these pitfalls and implementing the mitigations, asset managers can significantly improve their resilience. The next section addresses common questions that arise in practice.

Frequently Asked Questions on Building Resilience

In this section, we address some of the most common questions asset managers have about building resilience. The answers are based on industry best practices and the experiences of many firms, but should not be taken as specific advice for any individual situation.

How much cash should I hold during a downturn?

There is no single answer, as it depends on the firm's risk budget, client base, and investment strategy. A general guideline is to hold 5-15% of the portfolio in cash or cash equivalents during normal times, and increase this to 15-30% during periods of high uncertainty. The cash provides dry powder for opportunistic buying and acts as a buffer against redemptions. However, holding too much cash can drag on performance if the market rallies. The key is to have a predefined rule for when to increase or decrease cash, rather than making it a discretionary decision.

Should I hedge or accept drawdowns?

Hedging can reduce drawdowns but comes at a cost. The decision depends on the client's risk tolerance and time horizon. For long-term investors, accepting drawdowns may be acceptable if the portfolio is well-diversified. For clients with shorter horizons or lower risk tolerance, hedging is advisable. Tail risk hedging, as discussed earlier, can be effective but is not cheap. A cost-effective approach is to use options strategies like collars or put spreads, which limit downside while capping upside. Alternatively, using dynamic asset allocation to reduce equity exposure during downturns can serve as a natural hedge without explicit option costs.

How do I communicate with clients during a crisis?

Communication should be frequent, transparent, and empathetic. Start by acknowledging the client's concerns, then explain the firm's strategy and how it is positioned. Avoid making predictions about the market's direction; instead, focus on what you are doing to manage risk. Use multiple channels—email, video calls, webinars—to reach different client preferences. Provide a clear point of contact for questions. After the crisis, follow up with a detailed review of what happened and what was learned. One best practice is to send a 'crisis playbook' that outlines the steps the firm takes in different scenarios, so clients know what to expect.

What role does team structure play in resilience?

Team structure is critical. A flat hierarchy with open communication encourages diverse viewpoints and faster decision-making. Having a dedicated risk manager who reports to the CIO, not the portfolio managers, ensures that risk is independently assessed. Cross-functional teams that include analysts, traders, and client service staff can provide a more holistic perspective. Succession planning is also important; firms should have a clear plan for who will lead if the key portfolio manager is unavailable. Regular team training and scenario drills can help build muscle memory for crisis response.

How often should I stress-test my portfolio?

Stress testing should be done at least quarterly, and more frequently during periods of market stress. The tests should cover a range of scenarios, including historical crises (e.g., 2008, 2020) and hypothetical events (e.g., a 30% equity drop, a 2% rate hike). The results should be reviewed by the investment committee and used to adjust positions if necessary. Some firms also conduct reverse stress tests, asking what would need to happen for the portfolio to lose a certain amount, which helps identify hidden vulnerabilities.

These questions reflect real concerns that practitioners face. The final section synthesizes our key takeaways and offers a path forward.

Synthesis: Building a Resilient Future

Resilience in asset management is not a destination but a continuous process of learning, adaptation, and discipline. As we have explored, the best managers differentiate themselves through a combination of robust frameworks, disciplined execution, advanced tools, and a culture that values transparency and dissent. They understand that downturns are not just threats but opportunities to demonstrate their value to clients and strengthen their market position.

To synthesize the key takeaways: First, establish a clear risk budget and dynamic asset allocation framework that allows for flexibility in changing markets. Second, implement repeatable processes for rebalancing, risk monitoring, and decision-making that remove emotion from the equation. Third, invest in technology that provides real-time data and analytics, but ensure that human judgment remains central. Fourth, communicate proactively with clients, building trust through honesty and transparency. Fifth, avoid common pitfalls like overconfidence, ignoring liquidity risk, and failing to update investment theses. Sixth, use downturns as growth opportunities by hiring talent, innovating products, and strengthening client relationships.

Looking ahead, the asset management industry will continue to evolve. Regulatory changes, technological advances, and shifting client expectations will require ongoing adaptation. Firms that build resilience into their DNA will be better positioned to navigate whatever comes next. The journey starts with a commitment to continuous improvement, a willingness to question assumptions, and a focus on long-term value creation over short-term results.

As a next step, we recommend that you conduct a thorough review of your own firm's resilience practices. Use the frameworks and checklists provided in this article as a starting point. Involve your entire team in the discussion, and consider engaging external experts for an objective assessment. By taking action now, you can turn the lessons of this guide into lasting competitive advantage.