Strategic Risk Management
Strategic Risk Management presents an innovative approach to portfolio design. Often the risk management function is a series of tripwires that are activated after the portfolio is already in trouble. Strategic Risk Management presents a framework that seeks to integrate the initial portfolio design and the risk management function. Much of the book’s research was conducted pre-COVID-19; the market selloff in March 2020 offers a unique out of sample experiment that provides evidence supportive of the approach.
A crucial ingredient in this integrative design is to understand the performance of various investment strategies in stressful market conditions. The book begins by measuring the performance of various assets and strategies that purport to provide hedging abilities: such as put options and long gold positions. While put options are an extremely reliable, few would want to give up 700 basis points a year to buy this type of insurance. And even if gold does not have the type of drag that long options strategies do, gold turns out to be an unreliable hedge.
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We focus on two investments that historically offer impressive protection in adverse events: trend following strategies and quality-based equity strategies. We show that performance of trend following strategies is naturally linked to the payoff of a long call and long put position. This property is particularly useful in mitigating portfolio drawdowns.
The book also considers operational strategies such as portfolio rebalancing. Most investors routinely rebalance their portfolios, for example, to a 60/40 equity/bond mix. However, few investors realize that a mechanical rebalancing strategy increases drawdowns and portfolio risk. The reason is simple. In extended equity sell offs, the rebalancing strategy is to buy, which increases drawdowns. Strategic Risk Management offers an intuitive solution. If the trend following signal suggests that the drawdown will continue, delay the rebalancing. We call this strategic rebalancing.
The book contains various other insights, including analyzing the impact of a portfolio strategy that targets a certain risk level. This technique reduces allocations to the riskiest assets when volatility spikes. Given that surges in volatility are usually associated with plunging markets, this strategy also reduces drawdowns.
Strategic Risk Management is a thought-provoking resource for developing your portfolio design and risk management skills.
Active funds devote considerable effort to the search for excess returns, but risk considerations often fail to get anywhere near the same level of attention. The authors of this book take risk seriously and give it the consideration it deserves."
Learn how to incorporate risk management into the core portfolio design.
RISK MANAGEMENT
Achieve a more balanced return stream through volatility targeting of
higher-risk asset classes.
ACQUIRE TOOLS
Gain a deeper understanding of concepts such as portfolio rebalancing.
CONCEPT
UNDERSTANDING
Be equipped for the early detection of strategies or managers that have faded.
RULE SET
Understand which defensive strategies offer the most reliable and affordable protection.
DEFENSIVE
STRATEGIES
KEY BOOK TAKEAWAYS
AUTHORS
Campbell R. Harvey
Professor of Finance, Duke University and Investment Strategy Advisor, Man Group
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Professor Campbell R. Harvey, a leading financial economist, has been an Investment Strategy Advisor to Man Group since 2005 and has contributed to both research and product design.
He is a Professor of Finance at Duke University and Research Associate at the National Bureau of Economic Research in Cambridge, Massachusetts. He served as Editor of The Journal of Finance from 2006 to 2012 and as the 2016 President of the American Finance Association.
A fresh approach to managing risk, in good, bad, and ugly market conditions.”
Campbell R. Harvey
Professor of Finance, Duke University and Investment Strategy Advisor,
Man Group
Otto Van Hemert
Director of Core Strategies,
Man AHL
Sandy Rattray
Chief Investment Officer,
Man Group
Martin Leibowitz
President, Advanced Portfolio Studies LLC,
and Senior Advisor to Morgan Stanley
Active funds devote considerable effort to the search for excess returns, but risk considerations often fail to get anywhere near the same level of attention. The authors of this book take risk seriously and give it the consideration it deserves."
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Sandy Rattray is Chief Investment Officer of Man Group and a member of the Man Group Executive Committee. He is also a member of the Man Group Responsible Investment Committee. He was previously CEO of Man AHL from 2013 to 2017, and CIO of Man Systematic Strategies from 2010 to 2013.
Before joining Man Group in 2007, Sandy spent 15 years at Goldman Sachs where he was a Managing Director in charge of the Fundamental Strategy Group. He also ran Equity Derivatives Research at Goldman Sachs in London and New York.
Risk management is half the challenge of being a portfolio manager, and often the more-overlooked half.”
Sandy Rattray
Chief Investment Officer,
Man Group
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Otto van Hemert is Director of Core Strategies and a member of Man AHL’s management and investment committees.
He was previously Head of Macro Research at Man AHL. Prior to joining Man AHL in 2015, Otto ran a systematic global macro fund at IMC for more than three years. Before that, he headed Fixed Income Arbitrage, Credit, and Volatility strategies at AQR, and was on the Finance Faculty at the New York University Stern School of Business, where he published papers in leading academic finance journals.
This book introduces practical risk management tools that are grounded
in economic theory and illustrated
over decades of market data.”
Otto Van Hemert
Director of Core Strategies,
Man AHL
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FROM THE AUTHORS
FROM THE AUTHORS