Risk mitigating strategies also have to be risk managed

Risk mitigating strategies have to be risk managed because of the difficulty in quantifying the efficacy of those risk mitigating strategies, stated Fabien Pavlowsky, director - Global Macro & CTA Strategies at Lyxor Asset Management

Speaking at the latest Opalesque Roundtable New York, Pavlowsky said that risk mitigating strategies in general aim to provide protection during difficult times while also giving reasonable positive performance during normal market conditions

He added: "Understand that there is a compromise to be made between those two objectives. Striking the right balance between the need to protect and the need to perform is what we are trying to solve. We spend a lot of time educating clients about the strategies and the structures we employ for those types of solutions. A pillar of our investment framework is to understand when a particular strategy or a particular manager is no longer behaving within the range of our expectations and requires us to take action. in order to do that, we developed a series of quantitative metrics designed to help us set expectations prior to investing."

Pavlowsky said that Lyxor has found that communicating with their clients about those expectations is very beneficial. For instance, sometimes a client asked them a question if it is normal if their CTA portfolio, which was supposed to provide protection, is also down when the S&P fell. He said that in such cases, Lyxor would be measuring the CTA performance historically for every consecutive five day loss in the S&P between -5% and -10% and establish the distribution of returns of the CTA

"From that we are able to assess whether seeing negative performance for the CTA over the past years is like......................

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This article was published in Opalesque's New Managers a top-down monthly analysis, news and research publication on the global emerging manager space.