Risk Management
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We define, quantify and invest our portfolios, using a budgeting framework expressing exposure in terms of "cash usage" (leverage), "independent tracking-error" (standard deviation), and "value-at-risk" (maximum expected shortfall over a given time horizon).
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Sample Portfolio Risk Snapshot
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"Cash usage" is the simplest way to express exposure, measuring the extent by which a pool of cash is being put to work for any purpose of investment within a given portfolio.
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"Independent Tracking error" measures the volatility of returns considered individually at the position level and then aggregated at the portfolio level. It is a simple measure of standard deviation (volatility).
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"Value-at-risk" determines the maximum loss that a portfolio can statistically be expected to suffer, with a given set of positions, in the worst case, over a given time horizon (typically one day or one year) with a given confidence level (typically 95% or 99%). This confidence level will estimate that only 5% or 1% of the time can the portfolio be expected to lose more than this "var" number. The advantage of a var based estimation of risk is that it integrates diversification benefits in the estimation of risk (as opposed to "cash usage" and "independent tracking error").
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