Risk Management
Our firm’s philosophy on risk management is to balance quantitative and qualitative controls at the portfolio level, while supported by account level stop-loss controls.
- Manage total exposure and leverage to minimize downside risks
- The following risk metrics are monitored and managed in real-time: Margin-to-Equity Ratio, Gross Notional Exposure, and Account Vega
- Go beyond quantitative risk metrics to consider risk holistically and balance exposure
- Risk is considered on a holistic, portfolio-wide basis, and each position’s correlation to others in the account are considered in case of market shock
- Diversification does not necessarily decrease risk: if gold and silver are heavily correlated, a long position in both would serve to magnify risk
- Consideration is given as to how accounts would perform through various economic and sociopolitical scenarios (stress tests) rather than utilizing traditional risk metrics such as value-at-risk
- In hedging risk, overall directionality of portfolio is considered
- For example, if long position in gold is appealing, but crude oil appears overextended, a long gold position could be hedged by a short position in crude oil
- If attractive counter-directional trades cannot be found, position size on existing trades and margin to equity ratio is curbed
- Use options and currency strategies to hedge and balance portfolio
- Option strategies such as collars, short strangles, covered call writing, covered put writing and other spreading techniques employed to limit downside risk and create predictable risk/reward scenarios
- Lakshmi’s currency positions can be used as hedges to balance exposure (for example, since most commodities move inversely to the US dollar index, long exposure to the US dollar can be a hedge to long commodity positions)
We also offer a differentiated framework for risk management at the account level:
