Institutional investors of all types and sizes make use of numerous classes, or buckets, when allocating investment assets within portfolios. A functional allocation framework, where assets are aligned based on their functional role within a portfolio, represents a departure from the classic asset class allocation paradigm that has dominated the industry for decades. While the origin of such functional frameworks is generally believed to have occurred in the early-2000s, such structures did not experience broad adoption until after the Global Financial Crisis (“GFC”) of 2008-2009. Despite the fact that hundreds of billions of dollars are allocated via functional allocation frameworks, they still remain the minority.
This paper seeks to describe what functional allocation frameworks are, why they may be useful, and what their major challenges tend to be.