Traditional Risk Management Prevails08.17.2011
These days, many portfolio managers and traders tout their robust risk management systems. For some businesses, these high-cost, low-touch systems can provide a variety of benefits for midsize and larger trading operations. But sometimes, it can be prudent to get back to basics.
You don’t have to have a large infrastructure build out to help manage risk according to Scott Kubie who is chief strategist at CLS Investments. You need to essentially budget your risk and know how much you’re willing to take on as a company.
“CLS believes investors would be better off using an approach called ‘risk budgeting,’ which targets a level of risk specified for the portfolio,” Kubie told Markets Media. “Risk budgeting measures risk more effectively than stock-to-bond ratios while offering greater flexibility in the use of asset classes and active strategies.”
For smaller institutions that are looking to grow their business, it’s can be beneficial to take on more risk and gradually lower it over time as assets grow. It may create portfolio volatility at the onset, but it can end up paying off for a fund manager in the long run.
“While increasing risk in the early years makes the portfolio more volatile, lower sensitivity to the order of returns makes the final balance less volatile,” said Kubie. “By taking more risk in the market, the ending balance becomes less risky.”
“CLS offers a strategy which seeks to protect 30 percent of the portfolio from large downturns through a quantitative risk reduction strategy,” continued Kubie. “Many investors are diversifying their risk approaches by combining protection with CLS’s Risk Budgeting strategy, which targets a level or risk for the rest of the portfolio.”