Our Approach to Risk Management

 

Differentiated Approach to Risk Management...

 

Beyond thinking about risk in our top-down market overview and our bottom-up security selection process, we have also incorporated a differentiated approach to risk management into our portfolio construction process.

 

During Periods of Market Turmoil…

 

We believe that the standard portfolio construction discussion, typically focused on the balance between debt and equity, addresses only a narrow slice of the risk spectrum and importantly fails to protect against the most severe instances of market turmoil.

 

In periods of major market dislocation, correlations across seemingly disparate asset classes often increase due to market dynamics. We believe that markets are both repetitive and adaptive, in the sense that investment bubbles driven by crowd psychology are recurrent and perhaps unavoidable, but they seldom manifest themselves in exactly the same way. In other words, any investment or asset class can be made unsound.

 

Diversified portfolios designed to pay off in a variety of situations…

 

Our answer to this dilemma is to construct a diversified portfolio of asymmetric risk/reward situations that will each pay off under distinct scenarios.

 

We complement this approach with high balances of cash or instruments that we view as cash proxies when market conditions warrant such defensiveness.

 

Protect the client against the Unexpected…

 

The goal is to construct a portfolio that is robust in protecting the client against the unexpected, and maximizes the advantages of a contrarian active manager. We can then tailor this mix of exposures to our client’s needs without diluting our capabilities and effectiveness.