Markets remain near all-time highs even as the Federal Reserve has begun easing policy and investors look beyond 2025 toward an increasingly uncertain 2026. On the surface, confidence appears intact. Beneath it, however, structural shifts in market behavior, volatility dynamics, and macro regimes are forcing a rethink of how portfolios should be built and managed.
On this episode of Lead-Lag Live, hosted by Melanie Schaffer, the conversation focused on how portfolios can be constructed to adapt rather than predict through regime changes. The guest was Greg Babij, Co-Founder and Chief Investment Officer of Sundial, a multifamily office known for its deliberate, risk-aware approach to portfolio construction.
Why the Old Playbook Is Breaking Down
A central theme of the discussion was that portfolio management is fundamentally a probability game, not a prediction game. Traditional valuation metrics may matter over long horizons, but they are unreliable timing tools. With equity valuations elevated and forward returns likely to be more muted than in the past decade, the probability of consistently strong buy-and-hold outcomes has declined.
Compounding this challenge is a shift in market microstructure. The options market has grown larger than the equity market itself, with a significant share of volume now concentrated in very short-dated contracts. This has increased the likelihood of sharper, faster market moves, making static portfolios more vulnerable to volatility shocks and drawdowns.
The implication is clear: investors may need to rely less on passive exposure alone and more on tactical, non-correlated, and defensive strategies that can respond dynamically to changing conditions.
A Two-Lens Framework for Portfolio Construction
Sundial approaches portfolio construction through what Babij describes as a two-lens framework.
The first lens recognizes that there are only four macroeconomic regimes: growth, recession, inflation, and deflation. Rather than attempting to forecast which regime is coming next, portfolios are constructed to include exposures that can function across all four environments.
The second lens divides investments into stability-seeking and instability-seeking categories. Stability-seeking assets include familiar exposures such as equities, bonds, and traditional real assets, which tend to move together during crises. Instability-seeking strategies are designed to benefit from volatility, dislocation, or persistent trends.
By pairing the two, portfolios can remain resilient without requiring accurate macro forecasts. The emphasis is on diversification not just by asset class, but by how investments behave under stress.
Tactical Equity Exposure: Adjusting Risk With Conditions
Within equities, Sundial complements passive exposure with systematic, rules-based strategies designed to adjust risk over time. Babij framed this with a simple analogy: drivers slow down when conditions become dangerous and accelerate when conditions improve. Portfolios, he argues, should behave the same way.
One strategy focuses on concentrated exposure to stocks with strong price and earnings momentum, while another seeks to outperform major indices by truncating large drawdowns and selectively increasing exposure when market internals are healthy. Measures such as market breadth, advances versus declines, and new highs versus lows are treated as “vital signs” used to assess overall market health.
Defense, rather than offense, is treated as the priority. Avoiding major losses is viewed as more important than capturing every upside move.
The Role of Alternatives and Convexity
A distinguishing feature of Sundial’s framework is its heavy use of alternatives and niche strategies, particularly those with convex or asymmetric return profiles. Tail-risk hedging strategies may perform best during sudden crises, while systematic trend-following strategies can thrive during prolonged market declines.
These instability-seeking strategies are not intended to be permanent return engines. Instead, they serve as tools that can generate gains during periods of stress and then be rebalanced into other parts of the portfolio. This creates a disciplined risk-management loop that does not rely on market timing.
Preparing for the Next Market Cycle
The conversation underscored a broader message: the next market cycle may not resemble the last. Structural changes in volatility, market plumbing, and investor behavior suggest that portfolios designed solely for calm, growth-driven environments may struggle.
By focusing on adaptability, regime diversification, and a deliberate balance between stability and instability, portfolios can be positioned to navigate uncertainty rather than be surprised by it.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Sundial and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
