Strategic Risk Management: Designing Portfolios and Managing Risk (Wiley Finance)

Description

STRATEGIC RISK MANAGEMENT Having just experienced a global pandemic that sent equity markets into a tailspin in March 2020, risk management is a more relevant topic than ever. It remains, however, an often poorly understood afterthought. Many portfolios are designed without any thought given to risk management before they are handed off to a dedicated―but separate―risk management team. In Strategic Risk Management: Designing Portfolios and Managing Risk, Campbell R. Harvey, Sandy Rattray, and Otto Van Hemert deliver a reimagining of the risk management process. The book envisions a marriage between the investment and risk processes, an approach that has proven successful at the world’s largest publicly listed hedge fund, Man Group. The authors provide readers with a new framework for portfolio design that includes defensive strategies, drawdown risk controls, volatility targeting, and actively timing rebalancing trades. You will learn about how the book’s new approach to risk management fared during the recent market drawdown at the height of the COVID-19 pandemic. You will also discover why the traditional risk weighting approach only works on certain classes of assets. The book shows you how to accurately evaluate the costs of defensive strategies and which ones offer the best and most cost-effective protection against market downturns. Finally, you will learn how to obtain a more balanced return stream by targeting volatility rather than a constant notional exposure and gain a deeper understanding of concepts like portfolio rebalancing. Perfect for people working in the asset management industry and financial policy makers, Strategic Risk Management: Designing Portfolios and Managing Risk will also earn a place in the libraries of economics and finance scholars, as well as casual readers who take an active approach to investing in their savings or pension assets. PRAISE FOR STRATEGIC RISK MANAGEMENT “Strategic Risk Management shows how to fully embed risk management into the portfolio management process as an equal partner to alpha. This should clearly be best practice for all asset managers.” ―Jase Auby, Chief Investment Officer, the Teacher Retirement System of Texas “This book shows the power of integrating risk and investment management, rather than applying risk management as an afterthought to satisfy set limits. I was pleased to shepherd some of the key ideas in this book through the publication process at The Journal of Portfolio Management.” ―Frank J. Fabozzi, Editor, The Journal of Portfolio Management “Financial markets today are quite different from those of the last century. Understanding leverage, correlations, tails, and other risk parameters of a portfolio is at least as important as work on signals and alpha. In that sense, bringing risk management from ‘control’ to ‘front office’ should be a priority for asset managers. This book explains how to do it.” ―Marko Kolanovic, Chief Global Market Strategist, J.P. Morgan A powerful new approach to risk management in volatile and uncertain markets While the COVID-19 pandemic threw the importance of effective risk management into sharp relief, many investment firms hang on to a traditional and outdated model of risk management. Using siloed and independent portfolio management and risk monitoring teams, these firms miss out on the opportunities presented by integrated risk management. Strategic Risk Management: Designing Portfolios and Managing Risk delivers a fresh approach to risk management in difficult market conditions. The accomplished author team advocates for the amalgamation of portfolio design and risk monitoring teams, incorporating risk management into every aspect of portfolio design. The book provides a roadmap for the cr Cover Title Page Copyright Contents Foreword Preface Acknowledgments Chapter 1 Seeking Crisis Alpha Introduction Backdrop Outline Data Strategy Performance Skewness Crisis Alpha Concluding Remarks Appendix 1A: Sensitivity Analyses for Equity and Bond Crisis Alpha and Smiles References Chapter 2 Can Portfolios Be Crisis Proofed? Introduction Crisis Performance of Passive Investments Crisis Definitions Hedging with Passive Short Firm‐Value Strategies: Long Puts and Short Credit Risk Hedging with Safe‐Haven Assets: Long Bonds and Long Gold Active Hedging Strategies: Time‐Series Momentum A Simple Time‐Series Momentum Strategy Securities Included Performance of Futures Time‐Series Momentum Strategies Active Hedging Strategies: Quality Stocks Motivation to Look at Quality Stocks Evidence from Other Popular Factors Individual Quality Factor Performance Composite Quality Factor Performance Can Portfolios Be Crisis Proofed? Concluding Remarks Appendix 2A: Long Puts Using OTC Put Option Data from a Broker Appendix 2B: Longer View of Gold Appendix 2C: Additional Results for Quality Stocks References Chapter 3 Risk Management via Volatility Targeting Introduction Our Approach Data Volatility Scaling Performance Statistics U.S. Equities Unscaled Equity Returns Since 1926 Persistence of Equity Volatility Performance of Volatility‐Scaled Equity Returns Performance of Volatility‐Scaled Equity Returns and Robustness across Subsamples and Industries Performance of Volatility‐Scaled S&P 500 Futures Returns and the Use of Intraday Data U.S. Bonds and Credit Unscaled Bond Returns Since 1926 Persistence of Bond Volatility Performance of Volatility‐Scaled Bond Returns (Since 1963) Performance of Volatility‐Scaled Bond Returns (Since 1988) Performance of Volatility‐Scaled Credit Returns Futures and Forwards Persistence of Futures Volatility Performance of Volatility‐Scaled Futures Returns Portfolios Balanced 60–40 Equity‐Bond Portfolio Risk Parity Portfolio Volatility Scaling and the Sharpe Ratio of Risk Assets Leverage Effect Is Confined to Risk Assets Leverage Effect Introduces Some Momentum Momentum and the Impact of Volatility Scaling on the Sharpe Ratio Concluding Remarks Appendix 3A: Other Risk Metrics Appendix 3B: Autocorrelation of Variance References Chapter 4 Strategic Rebalancing Introduction Comparing Rebalanced and Buy‐and‐Hold Portfolio Returns Impact of a Simple Trend Strategy Allocation Strategic Rebalancing Strategic Rebalancing versus a Direct Allocation to Trend Concluding Remarks Appendix 4A: Certainty Equivalent Performance Gain Appendix 4B: Adding Trend to a 100 Percent Rebalanced Portfolio Appendix 4C: The 30–70 Portfolio References Chapter 5 Drawdown Control Introduction Drawdown Greeks Probability Distribution for Maximum Drawdown Level Drawdown Greeks without Higher‐Order Effects Bootstrapped U.S. Equity Returns The Impact of Gap Risk Manager Replacement Rules Classification at the End of a 10‐Year Observation Period Monthly Evaluation Monthly Evaluation with a Changing Drawdown Threshold Drawdown‐Based Risk Reduction Rules Concluding Remarks Appendix 5A: Heteroskedasticity for U.S. Stocks References Chapter 6 Man versus Machine Introduction Classification of Hedge Funds Risk Factors Empirical Analysis: Macro Funds Empirical Analysis: Equity Funds Diversification Potential of Different Hedge Fund Styles Concluding Remarks Appendix 6A: Fund Classification Method Appendix 6B: The Recent Rise of Liquid Alternative CTA Mutual Funds References Chapter 7 Out‐of‐Sample Evidence from the COVID‐19 Equity Selloff Introduction The Best Strategies During the COVID‐19 Equity Selloff Volatility Targeting Strategic Rebalancing Concluding Remarks Notes About the Authors Index EULA