To better understand the management of portfolio risk during this period of persistent volatility, I reached out to one of my brightest partners on my radar for his insights on how he and his macro team navigate the challenges for their clients. He is a partner and a good friend, with whom I have had the privilege of working in various capacities for over 25 years.
Backed by his team, he has worked hard to build an alternative investment platform that he believes goes beyond what is traditionally accessible to most investors. With projected double-digit returns, single-digit volatility, and zero correlation to stock and bond markets, their range of investment solutions offer attractive attributes.
It was a long update from him this morning. You cannot afford to miss this. I hope to catch up with him during my next trip to Singapore.
Here is a section:
We rigorously and continuously assess the narratives driving market sentiment, placing a strong emphasis on risk management. Before taking on market positions, we determine the optimal risk exposure by defining risk ratings.
These ratings are derived from evaluating the potential outcomes of the narratives, the current asset class price levels relative to market sentiment, and the developing narrative’s impact on those price levels. These risk ratings, along with our ongoing analysis of market narratives, guide our strategy selection, trade sizing, position adjustments, and exit strategy planning.
When trading on the Yen carry phenomenon or its unwinding aftermath, our approach begins with a thorough analysis of the narrative background and its associated risks. This phenomenon arose from the relatively weak Yen, influenced by the then Bank of Japan’s (BOJ) dovish policies, while the Fed delayed rate cuts.
Understanding the risks associated with Yen carry trades or their unwinding, particularly the potential pivots in BOJ and Fed policies, is crucial. As we monitor these narratives, we adjust our trade exposure accordingly to the change in the risk ratings.
In response to the recent market development, we raised risk ratings based on our assessment of shifts in economic data that could prompt policy pivots. This decision was also influenced by verbal interventions from the Bank of Japan and statements from the Federal Reserve.
The recent price correction across various asset classes, which triggered panic and heightened volatility, was largely driven by the unwinding of Yen carry trades, a direct result of the BOJ’s rate hike and hawkish guidance, coupled with weaker US economic data prompting more easing expectations. Carry traders were forced to sell their existing positions to raise cash and buy back Yen.
By recognizing these event-driven risks, we opted for a contrarian strategy capitalizing on the strengthening Yen as a more favorable opportunity with a better risk-reward profile rather than following the crowd and chasing prices at levels that signaled elevated risk.
This disciplined approach of taking contrarian positions or avoiding high-risk trades when narratives shift is consistent with our investment philosophy, which prioritizes meeting annual return targets while safeguarding capital.
Risk management through risk rating is deeply embedded in our investment process. With continuous narrative analysis serving as a cornerstone, it has helped us to safely navigate the recent extreme market volatility.