Holistic Approach to Portfolio Risk Management
- We turn data into intelligence
- Our managers are required to provide holdings based transparency
- We use transparency to understand historical relationships and identify risk profiles of different organizations
- Talented staff with deep experience managing portfolio risk at hedge fund level
The systems and practices K2’s risk team employs – the firm believes – are the most sophisticated and capable in the industry, and extend well beyond the tools offered by standalone third-party risk services. Assessing true risk requires looking at each fund and strategy in a granular way, and at the individual security level. One model, data point, or set of data points cannot be deemed suitable to define risk, particularly when applied to the complex investment landscapes of today. To obtain a truly holistic view of risk, K2 monitors exposures across risk types (market, credit, concentration, and liquidity), asset classes, and instruments, at both the underlying fund level and portfolio level.
Among the factors observed are betas, exposures by sector and sub-sector, exposures by region, leverage, liquidity, correlations, and volatility. The firm has also refined techniques to measure illiquid positions, employing both quantitative and qualitative methodologies. Rigorous Value at Risk analysis is conducted, using underlying funds’ individual asset holdings in full Monte Carlo simulations (thereby capturing non-normality, a distinct advantage over calculations that use only monthly return data which may not be representative of the full range of market conditions.) Intensive stress test practices are also employed, measuring against extreme sensitivities and historical environments (Fall 1998, 2008 crisis, etc.). These are augmented by worst-case scenarios where assumptions about cascading risk are pushed to the edge of historic precedent. Finally, robust risk factor and performance attribution analyses are conducted, such that the factors/indices influencing performance and over a particular period are understood.
"In today’s complex financial universe, K2 believes one needs to work harder than at any time in recent history to truly comprehend and measure risk, aggregating many views and data points so that a real picture – with sharp resolution – emerges."
Senior Managing Director, Risk Management