Risk management is an integral part of our investment process.
How do we define risk?
Risk is the exposure not to asset price fluctuation, but to permanent or – at the very least – long-term loss. Unfortunately, this is not as “easy” to calculate (as, say, the key metric “volatility” is).
What does that mean?
First, it means that we continually scrutinize our assessments. All portfolios are mapped in our portfolio management tool with a designated price updating interface. In turn, we are able to gauge, at any and all times, what impact (unexpected) information may have on current portfolios. Second, it means that, in our risk-management efforts, we monitor daily for the status of all positions, on the one hand, and for overall portfolio risk, on the other. These efforts also include the monitoring not only of risk indicators such as VaR, CVaR, or maximum drawdown, but also of performance contributions. Stop-loss brands are used not as “hard” exit, but rather as “soft” warning signals.
Since at least Harry Markowitz, the American economist, we know that diversification can lower risk (“don’t put all your eggs in one basket”). In addition to the usual diversification practice across asset classes, country/sector/segment, and holdings size, we focus on diversification across risk factors, including value, growth, quality, and momentum. This focus bolsters our portfolios and renders them more robust and, in times of crisis, more stable.
Risk budget control
In contradistinction to rigid risk management systems such as CPPI or VaR, we manage the risk budget within our portfolios flexibly to ensure that our risk budgeting efforts can get us through even very volatile phases such as those experienced in 2008 and 2011. In other words: allocation is managed to ensure the constant availability of the risk budget and to guarantee market re-entry after weak phases