The following article is from Mohican Financial Management, LLC. Mohican is a hedge fund manager dedicated to convertible arbitrage with AUM of US$135m, mostly in managed accounts.
Let’s be clear
The first and last requirement of good investment management is that the interest of the investor and the interest of the manager be one and the same. At the outset, the levels of opportunity to be pursued and the concomitant risk to be incurred must be clearly understood and agreed. In particular, investors should not be misled by the hordes of risk gurus and their large body of literature into thinking that there is a solid connection between popularized risk measures and every-day portfolio decisions.
Next, a scorecard that doesn’t separate luck from skill may be sufficient for games of sport, but investors demand better. They need to distinguish between two managers who post the same return over the same period of time. Investors are well served in this respect by alpha, beta and Omega Ratio; they are ill served by risk-adjusted return and other Gaussian-based measures that lack validity, especially when applied to the ideal fat head / thin tail return profile.
Finally, there is but one reason to incur risk, which is to pursue opportunity. Every investment decision by a manager must deal simultaneously with opportunity and risk in an attempt to optimize the mix. Yet a one-sided body of risk terminology and history of risk data has developed that ......................