Unconstrained Investing: What It Is and How It Works
Unconstrained investing is an approach that frees portfolio managers from strict benchmark tracking. Instead of aiming to match or modestly beat an index (like the S&P 500), managers pursue returns across a wide range of asset classes, sectors, geographies, and instruments to achieve performance objectives over time.
Key points
- Managers are not required to adhere to a specific benchmark.
- Strategies can span equities, bonds, currencies, derivatives, and other instruments.
- The approach emphasizes flexibility and absolute or risk-adjusted returns rather than relative performance versus an index.
- Greater freedom can increase both return opportunity and manager-specific risk.
Why it emerged
Unconstrained strategies gained traction after investors and managers questioned the value of strict benchmark-centric investing—especially following market events that exposed concentrated risks in traditional index-based allocations. The goal is to avoid the constraints that can prevent timely responses to changing markets.
Explore More Resources
How it works
- Multi-asset, multi-sector approach: Managers allocate across global asset classes and sectors to capture the best ideas without being forced into a fixed weight or index composition.
- Flexible fixed-income management: Bond portfolios can move beyond fixed rating or sector constraints, change currency exposure, and use duration positioning more freely.
- Use of derivatives: Options, futures, and other derivatives are commonly used for hedging, yield enhancement, or directional positioning.
- Internal risk frameworks: Although external benchmark constraints are relaxed, managers typically operate under internal limits, risk metrics, and governance to control exposures.
Benefits
- Greater agility to exploit market dislocations and thematic opportunities.
- Ability to pursue absolute or risk-adjusted returns rather than conforming to index performance.
- Broader toolkit (derivatives, foreign securities, alternative assets) can enhance diversification and return sources.
Risks
- Investment-manager risk: Success depends heavily on the manager’s skill, experience, and decision-making. Poor choices can materially harm returns.
- Complexity and opacity: Use of derivatives and diverse instruments can increase complexity and reduce transparency.
- Potential for higher fees and variable liquidity depending on strategy design.
Who offers unconstrained strategies
Both specialist teams and large asset managers provide unconstrained funds and mandates. These strategies are available in various formats—mutual funds, hedge funds, and institutional mandates—and may be targeted at retail, accredited, or high-net-worth investors depending on structure and regulation.
How to evaluate an unconstrained strategy
- Manager track record across market cycles and similar mandates.
- Clear description of investment process, permitted instruments, and risk management.
- Transparency on fees, liquidity terms, and use of leverage and derivatives.
- Risk controls and limits (stress tests, scenario analysis, concentration rules).
- Alignment of interests (fees, ownership, and governance).
Bottom line
Unconstrained investing removes benchmark-imposed limits to give managers latitude to pursue returns across a wide investment universe. That flexibility can improve opportunity and diversification but raises reliance on manager skill and risk governance. Investors should assess strategy design, manager experience, risk controls, and cost before allocating.