Diversification is often discussed in terms of broad asset allocation. For Jonas Thulin, the CIO of the Third Swedish National Pension Fund (AP3), diversification is not only about spreading risk across asset classes. It is equally about how those exposures are managed over time. Tactical adjustments form a central pillar of AP3’s approach, adding a layer of flexibility that strengthens diversification when markets shift. A carefully selected group of hedge funds provides an additional source of uncorrelated return. The result is a multi-layered diversification model built on asset classes, tactical timing, and alternative strategies.

“True diversification always goes back to having exposure to different asset classes. However, an additional important source of diversification for us is timing the market.”

Jonas Thulin, CIO at AP3.

“True diversification always goes back to having exposure to different asset classes,” acknowledges Thulin, who is widely recognized for his tactical orientation toward asset allocation. “However, an additional important source of diversification for us is timing the market. If we are successful in timing the market, we might not be as dependent on having a maximally diversified portfolio, because part of the diversification job can actually be solved, or taken advantage of, through market timing.” Under Thulin’s leadership at AP3, tactical adjustments have become an important source of diversification, implemented from both a top-down and bottom-up perspective.

Staying Long Term by Managing the Short Term

The tactical mindset that Thulin brought to AP3 does not generally lead to major shifts in the long-term strategic allocation across asset classes. “The dream scenario is that we don’t have to shift, and that the underlying assets we own and pay for in cash, such as equities, fixed income, alternatives, timberland, and private equity, remain in place,” he says. “And we can handle most, if not all, risks through the tactical overlay.” This approach allows AP3 to maintain its strategic exposures. As Thulin describes it, “We can keep working as long-term fundamental investors while the tactical overlay is running around taking the punches and opening the doors.” The tactical framework also ensures that the AP3 team “doesn’t get stressed into divesting an asset that we think will be really good over the long term.”

“By staying active in the short term, we actually create the conditions that allow us to remain long term.”

Jonas Thulin, CIO at AP3.

“The whole idea of the tactical for us is to uphold our long-term objectives and ensure that we can truly stay long term,” he emphasizes. Thulin argues that the relationship between long-term investing and short-term management is widely misunderstood. “Some say they ignore the short term because they are long-term investors. For us it works the other way around. To be long term, we must manage the short term effectively,” he adds. “It creates so much more calm in the portfolio. By staying active in the short term, we actually create the conditions that allow us to remain long term.”

Operating in a Fast-Turning Market Environment

Thulin recently shared these insights while speaking at an event in London, where he was joined by more than 300 institutional investors. From the discussions in the room, he sensed a clear shift in how global investors are trying to navigate fast-changing and often sharply turning markets. “I have been meeting with the biggest investors in Japan, South Korea, and Australia, and you can really sense this in the room,” he says. “There is a clear divergence emerging, and it is a global phenomenon. How do you operate in an environment like this? Do you follow the data? Do you use AI? Do you go more quantitative? Or do you lean on narratives and storytelling?” According to Thulin, “It is crucial to understand why the market is falling, identify the factors behind it, and constantly judge whether we should act or simply stay calm during the downturn.”

“It is all about numerical analysis. The level of information and data available today is extraordinary.”

Jonas Thulin, CIO at AP3.

This decision-making process always goes back to data. “It is all about numerical analysis. The level of information and data available today is extraordinary,” says Thulin. “We have largely stopped relying on strategists and economists and replaced much of that traditional input with data.” While many investors spend time debating political developments or macro narratives, AP3 focuses instead on what the data implies for timing. “We do not sit around discussing US politics in detail. For us the real question is how we should time it.” The team has identified data sources that “with two months of lead time, anticipate the swings in U.S. politics.”

Data-Driven Tactical Decisions Deliver Results

This capability has already proven useful, including in 2025. “It pinpointed Liberation Day, the US government shutdown, and even the trough when the market would begin to turn higher,” recalls Thulin. “We were not doing this two, three, or four years ago.” Ahead of Liberation Day, AP3 held a short position in the S&P 500 through the tactical overlay, which Thulin calls “probably my best trade of the year.” This disciplined tactical mindset has been one of the factors placing AP3 among the strongest-performing pension funds globally. AP3 ranks at the top of its peer group in terms of Sharpe ratios, returns, and volatility, while also being among the most cost-efficient.

Despite the complexity behind the data collection and analytical process, Thulin describes the actual implementation of the tactical overlay as straightforward. “For us the overlay is essentially about being long or short specific markets. Either we maximize our long exposure, or we take it off entirely and protect the portfolio through short positions. We have not done anything more fancy than that.”

Hedge Funds as an Additional Layer of Diversification

The ‘fancy’ element, Thulin says, comes from AP3’s hedge fund allocation. This includes “strategies that actually add value to the portfolio” and that provide “uncorrelated, stable returns, especially relative to equities.” The hedge fund lineup includes strategies targeting absolute returns in the double digits but also strategies that do not have strong returns as their ultimate objective. “We are completely comfortable with a manager delivering around five percent a year, as long as the returns are uncorrelated with the fixed income side,” Thulin explains the latter group of strategies. “Overall, it is a mixed bag.”

“We are currently assessing whether we should increase the [hedge fund]allocation, whether the current size is appropriate, and how it should evolve.”

Jonas Thulin, CIO at AP3.

Although the hedge fund allocation is not one of AP3’s largest exposures, it remains an important complement. “We are currently assessing whether we should increase the allocation, whether the current size is appropriate, and how it should evolve.” This allocation adds another layer of diversification on top of asset classes and tactical overlays. But more importantly, tactical adjustments remain the central pillar, creating a flexible overlay that supports a multi-layered diversification model far beyond traditional asset class diversification.

Diversification Today Requires Real Adaptability

Achieving diversification today is not necessarily more difficult than ten years ago, Thulin says, but it requires organisations to be prepared to adapt. “It is not more difficult, but it increases the demands on the organisation to be ready to adapt.” It requires a willingness to adjust exposures and act decisively rather than relying on broad notions of agility and flexibility. The challenge, he adds, is identifying what types of exposures and tools are needed to achieve true diversification effects in today’s markets.