Risk Management

Risk Management

Risk exposure should be proportionate to its relative contribution to overall returns and in line with a client’s risk tolerance.

The twin pillars of asset allocation and risk management are vital to building and protecting long-term wealth.

Both disciplines involve finding the appropriate balance between risk and return, identifying the asset class mix reflecting that optimal solution, and staying the course.

Risk management contributes to generating long-term returns.  It reduces deviation from a strategic plan and helps avoid overreaction to turbulent markets. Isolating the components of total portfolio risk enables us to understand the contribution of each asset class and manager, and to identify the “hot spots” in portfolios. We actively strive to protect clients from any identified risk concentration.

  • We use certain asset classes that have had positive returns during many adverse markets to protect against abnormal downside market risk. Diversification is by source of risk, not just asset class. We tactically reduce exposure to risky assets when they are overvalued, due to abnormally low risk premia, credit spreads, and dramatic commodity price increases.

  • Using stress tests, we measure tail risk and consider the impact of illiquidity on value. Our approach stands in contrast to many current methods of quantitative risk management, which tend to be based on inaccurate assumptions, such as a normal distribution of returns, investment decisions made rationally, or the ability to forecast return and risk parameters with historic averages.