Strategic Risk Management: Designing Portfolios and Managing Risk

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"Risk management is a trending topic. We have recently lived through the global pandemic, which sent equity markets into a tailspin. Despite its relevance, risk management remains a poorly understood afterthought, with portfolios designed and handed off to the risk management team without a backward glance. Our book presents a different vision. It is based on the integration of the investment and risk processes, the cornerstone of the success of the world's largest publicly listed hedge fund company, Man Group, to which the authors are affiliated. Market selloffs, such as the one we experienced in the first quarter of 2020 with the global Covid-19 pandemic, are fresh reminders of the importance of risk management. Unfortunately, it is only after these painful episodes that investment processes are re-examined. Indeed, a popular approach is to have two separate groups with a fund. The portfolio is designed by an investment management team and then handed off and monitored by a risk management team. This approach essentially sets tripwires that trigger risk reductions. We advocate a different approach. Risk management should be an integral part of the portfolio design. This is what we refer to as strategic risk management. In this book, we set forward this new framework where we explore critical aspects of portfolio design including: defensive strategies, drawdown risk controls, volatility targeting, and actively timing rebalancing trades. We have published a number of research papers on these components of risk management. The first quarter of 2020 provided a unique out-of-sample test. Our book also explores how our recommendations fared in the most recent drawdown"-- Provided by publisher