Risk Management

Credit risk, also knows as counterparty risk, is the possibility of losses arising from a borrower or a counterparty default by failing to make required payments. In our situation, we have credit risk exposures with counterparties keeping our investment capital in custody, including our prime brokers and custodians.

In order to monitor our credit risk, our team periodically reviews our current counterparties to make sure that our credit risk exposure is within predefined limits. In addition, we aim at establishing relationships with multiple counterparties in order to mitigate our financial exposure to one particular entity.

Liquidity risk is the possibility that for a certain time period a given financial asset cannot be traded quickly enough without having a substantial market impact due to a lack of buyers or sellers. This situation arises in particular with alternative investment managers, like private equity, and venture capital companies making investment in private equity or debt securities, or with hedge funds trading illiquid and more exotic securities.

We try to minimize our liquidity risk by investing the majority of our capital in public investment products traded on regulated exchanges, meeting certain criteria regarding liquidity and trading volume.

Margin risk is the possibility of incurring losses due to margin calls from a broker, and consequent liquidation of positions, arising from a lack of enough capital needed to keep the investment positions opened. In our case, margin risk arises from the fact that our investment strategies trade derivative instruments with embedded leverage due to the use of margin financing.

In order to minimize margin and leverage risks, we require our clients to properly fund their investments in our funds by depositing enough capital to minimize margin risk.

Execution risk is the risk due to the possibility of receiving a different transaction price from the moment when an investment decision is made until its effective execution. It results from many reasons, such as human delays in executing an investment decision in the case of discretionary investment managers, or from the need to reduce market impact due to a lack of sufficient liquidity in the financial instrument traded in case of large institutional investors.

We try to mitigate execution risk by utilizing automated execution algorithms that try to capture investment opportunities as soon as they arise.

Asset class risk is the possibility of losses by having a portfolio concentrated in a particular asset class. This risk arises typically in some hedge fund strategies, like equity long-short, credit, convertible bonds, merger arbitrage, activist investors, or commodity traders who invest in only a particular asset classes. Since a major components in the returns of a particular security are due to systemic factors affecting a particular asset class, measured by its beta, the previous investment entities are usually excessively exposed to risks affecting a particular asset class in a specific time period, unless they hedge their market risk exposure with proper derivative instruments.

We aim at reducing out asset class risk exposure by investing in multiple strategies and imperfectly correlated products covering multiple asset classes, including Equity, Fixed Income, Commodities, Currencies, and Volatility.

Sector risk is the risk arising from investment in a particular market sector, such as technology or biotech. This type of risk is prevalent in equity and credit hedge funds targeting a particular industry, or in venture capital and private equity companies which are highly exposed to the technology sector.

In order to minimize sector risk, we have the objective of deploying capital globally on multiple asset classes and different equity sectors through a diversified portfolio.

Geographic region risk is the possibility of losses due to the concentration of investments in a particular geographic area. This type of risk is prevalent in hedge funds and alternative investment managers focusing on a particular geographic region, like North America, Europe, Developed World, or Emerging Markets.

In order to mitigate geographic region risk, we invest globally on multiple public exchanges and investment products across the world.