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Blink 3 of 8 - The 5 AM Club
by Robin Sharma
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Strategic Risk Management summary
Campbell R. Harvey, Sandy Rattray & Otto van Hemert
Designing Portfolios and Managing Risk
15 mins
Brief summary
Strategic Risk Management by Campbell R. Harvey, Sandy Rattray & Otto van Hemert explores the importance of effectively managing risk in today's dynamic business environment. Offering practical strategies and insights, the book provides a comprehensive framework to navigate and mitigate strategic risks.
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Strategic Risk Management
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Key idea 1 of 7
Crisis alpha
Let’s talk about crisis alpha.
This strategy is all about generating extra returns when the market hits a rough patch. Trend-following strategies come into play here, dynamically adjusting risk to keep those returns safe. These strategies involve selling when the market drops and buying when it rises – all to catch momentum across different types of assets, from stocks to bonds and commodities.
But there’s a question lurking: Can they still work if government bond yields start to climb?
Research suggests that trend-following in bond futures has a solid track record of protecting against tail risks. This happens because bonds often move in a different direction than stocks. If you were to remove the exposure to trends in the bond market, you might lose some of that downside protection.
The thing to remember is that trend-following isn’t limited to just stocks; it can work wonders for government bonds too. Its power comes from the diversification across different types of assets – sticking to non-equity markets only might not give you the best drawdown protection.
Some folks might still be skeptical about whether momentum strategies can stay profitable. But it’s a proven fact that diversified trend-following has been delivering crisis alpha for over half a century.
So, for portfolios looking to weather crises, adaptive systems designed to reduce risk and keep those returns coming are a promising path forward.
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What is Strategic Risk Management about?
Strategic Risk Management (2021) reimagines risk management in the wake of the COVID-19 pandemic. This new framework emphasizes a unified approach that aligns investment and risk processes – featuring defensive strategies, drawdown risk controls, volatility targeting, and rebalancing.
Who should read Strategic Risk Management?
- Savvy investors
- Financial professionals
- Finance students and enthusiasts
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