Risk Management Process

A rigorous risk-management process seeks to identify, measure, monitor and manage the various elements of portfolio risk. Its implementation is facilitated via a robust suite of analytical frameworks and reports, including:

• portfolio volatility analysis
• stress testing and scenario analysis
• liquidity analysis
• stop-loss safeguards
• historical risk-return and “alpha” analysis

Portfolio volatility analysis:

The objective is to forecast the overall level of portfolio volatility and measure the stand-alone risk and assess the diversified contribution of the longs and shorts, sector and industry groups, geographical regions, and individual stocks to portfolio volatility. In addition, the following risk and exposure metrics, among others, are addressed:

• “VaR”
• risk-adjusted exposure
• exposure dissection across fundamental factor dimensions
• stock-level risk-adjusted returns

Stress testing and scenario analysis:

Stress testing provides a qualitative estimate of the resilience of the portfolio to extreme events and breakdowns in correlation. Historical stress testing assesses the sensitivity of the current portfolio to certain pre-identified historical events and systemic risk-premium shocks.

Scenario analysis illustrates adverse basis risk (correlation mismatches) between longs and shorts, both on “concentrated” positions as well as on an industry basis. The effects of discreet shocks to industry and macro asset-class factors are also explored.

Liquidity analysis:

This framework measures the stock-specific and portfolio-wide liquidity and assesses the evolution of gross-exposure liquidation as time elapses. It also provides industry and market capitalization-based liquidity granularity, as well as short-interest and analyst-ranking statistics. Stocks representing large days-volume-owned and those with high short-interest, off-consensus longs and/or vulnerable shorts, are highlighted.

Stop-loss safeguards:

A stock-level analysis, designed to complement traditional cost-based stop-loss criteria, that details actual realized and expected future, short-term price moves and flags volatility-scaled “outliers” and stocks that have breached a discreet threshold. Additionally, stocks that have experienced significant drawdown and claw back, relative to their near-term high- and low-water mark, are also highlighted. Finally, portfolio-level drawdown safeguards are also addressed.

Historical risk-return and “alpha” analysis:

A detailed risk-return report card based on actual, realized P&L and exposure statistics, including:

• return, volatility, risk-adjusted metrics, correlation, and exposure statistics vs. benchmark indices over varying time horizons
• detailed risk-return-exposure attribution
• performance benchmarking and stock and industry-selection “alpha” analysis

Proprietary and confidential to Risk Advisors