Why Multi-Asset Funds Fail in Bear Markets and How to Build a True Diversified Portfolio

The allure of “one-stop-shop” investment solutions is undeniable. Multi-Asset Allocation Funds (MAAFs) promise to simplify portfolio management by blending equities, bonds, gold, and other assets into a single package. But as history shows, these funds often fall short in bear markets. Their rigid structures, hidden risks, and inability to adapt to extreme volatility expose critical flaws. Below, we dissect why MAAFs fail and why investors should take control by building their own diversified portfolios.

The Pitfalls of Multi-Asset Funds

1. Timing Failure: MAAFs Can't Predict Crashes

The most glaring weakness of MAAFs is their inability to time asset class rotations. While some funds, like the Catalyst/Millburn Hedge Strategy Fund (MBXIX), have historically outperformed during specific downturns (e.g., the 2008 crisis), their success hinges on luck rather than consistent strategy.

For instance, during the 2020 crash, while the S&P 500 dropped 34%, MAAFs like MBXIX—despite their hybrid equity/futures strategy—failed to replicate their 2008 success. The fund's reliance on volatile equity/gold mixes and derivatives left it exposed to liquidity crunches.

2. Overconcentration and Hidden Risks

Many MAAFs are marketed as “diversified,” but their portfolios often concentrate risk in ways investors don't anticipate. For example:
- Equity Bias: Funds like Motilal Oswal Balanced Advantage held excessive mid/small-cap equity exposure, leading to steep losses during the 2020 crash.
- Gold as a False Shield: While gold is marketed as a hedge, its performance is inconsistent. During the 2008 crisis, gold rose 32%, but in 2020, it only gained 19%—not enough to offset equity declines.

3. Cost and Lack of Transparency

MAAFs often charge high fees (1-2% annually) for strategies investors could replicate themselves. Worse, their use of derivatives and opaque asset allocations makes it hard to assess true risk exposure.

The Solution: Build Your Own Portfolio

1. Control Through Asset-Class Level Diversification

Instead of relying on a fund's opaque mix, construct a portfolio with discrete allocations to key asset classes. A sample structure:

Asset Class	Allocation	Tool to Use
Equities	60%	Low-cost index ETFs (SPY, VOO)
Bonds	20%	Short-term Treasuries (SHY)
Gold	10%	Physical gold or GLD ETF
Real Estate	5%	REIT ETFs (IYR)
Cryptocurrency	5%	BTC/ETH via a reputable platform

This avoids the “black box” risk of MAAFs and allows proactive rebalancing during market shifts.

2. Disciplined Rebalancing with SIPs

Use Systematic Investment Plans (SIPs) to buy more of undervalued assets during downturns. For example:
- In 2020, as equities crashed, investors could have increased allocations to the Bloomberg US Aggregate Bond Index (up 8.9% YTD through March 2020).
- Crypto's role: During the 2022 bear market, BTC's -65% decline created buying opportunities for those with dry powder.

3. Avoid Recency Bias with Historical Context

MAAFs often overweight assets that performed well recently (e.g., tech stocks in 2021 or crypto in 2021), amplifying losses when trends reverse. A self-built portfolio lets you stick to a predefined asset allocation, avoiding emotional overreactions.

Why This Works in Bear Markets

• Equities (60%): Index funds offer broad exposure without sector overconcentration.
• Bonds (20%): Short-term Treasuries act as ballast, as seen in 2020 when they lost just 0.6% in March.
• Gold (10%): Historically provides asymmetry: limited downside but upside during crises.
• Real Estate/Crypto (10%): Adds non-correlated risk, though size matters—stay under 10% for crypto.

Final Verdict: Take Control

MAAFs are a convenient fiction. They trade simplicity for risk management, charging fees for strategies you can execute better yourself. By building a structured, asset-class-diversified portfolio with discipline, investors can mitigate volatility and avoid the pitfalls of black-box funds.

Investment Action Steps:
1. Audit your current holdings: If you own MAAFs, identify their hidden exposures.
2. Sell high-cost funds: Replace them with low-fee ETFs and physical assets.
3. Automate rebalancing: Set SIPs to buy equities on dips and bonds on rallies.

In bear markets, control is currency. Don't outsource it to a fund that can't outperform.

Data as of June 2025. Past performance does not guarantee future results.