Investing Is Effective Risk Management

 

Let me be the first to tell you that I firmly believe investing comes down to effective risk management. Like you and many of your clients, no doubt, I have spent my life building wealth and at this point it’s most important to feel my assets are working for me. 

Every investment I consider must have an asymmetric risk/reward profile providing me with the confidence that I am exposing myself to the smallest possible downside while participating in the upside.  Serving as the chairman of an investment committee I am presented with different investments all the time.  From my perspective, alternatives should become a larger core component to our endowment portfolio as well as one’s overall personal investment mix. 

History has shown that hedged strategies may decrease a portfolio’s overall correlation to the broad markets while lowering a portfolio’s risk and volatility.  Long-short has historically led to great downside protection (down capture) which measures how a portfolio performs in negative markets.  I believe investors should focus on risk-adjusted returns and alternatives may offer the added benefit of profiting in difficult markets. 

A benefit of the market correction of 2008 has been the increased availability of numerous types of alternative strategies. Investors can now access alternatives by investing in publicly traded long-short mutual funds, limited partnerships, or exchange traded funds (ETFs).  We now have the advantage of greater liquidity and a higher degree of transparency than has been available in the past.

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