# Strategic Risk Management Author: [[Sandy Ratray]] ## Review Some interesting insights into portfolio construction but nothing revolutionary. The authors put forth an argument that risk management should be integrated with the investment process. I recognize that it doesn't work that way for some asset managers and banks but most passionate investors would think this is obvious. Risk is arises through hidden assumptions and unfavorable outcomes embedded in investment processes and analysis. Portfolio construction needs to be holistic (combined risk+investment processes) in order to understand and mitigate risks. They dedicated chapters to common risk management practices and dove into each with some detail. Trend following across different asset classes: the equity exposure of trend following is similar to a long straddle. The whole book builds off this first chapter and they use trend following as an investment signal through, for example by adding it to asset allocation strategies or using it for strategic rebalancing. Volatility targeting: it improves sharpe for equities and credit (volatility rises during stress so cutting risk during those times is similar to trend following). Doesn't work well for bonds and commodities because volatility tends to be to the upside. This chapter changed my perspective on volatility scaling. It is often used in asset allocation but now I'm skeptical that changing allocation in the short term based on volatility is a good idea. Trend seems to be a better tactical indicator. Long term vol scaling (risk parity) is different because the scaling doesn't change over short periods. They examine the performance of a number of defensive strategies. They cover tail hedging, credit protection, quality or defensive long-short trades. L/S on quality/defensives has positive carry and performs very well during bear markets and recessions. Gold is an unreliable hedge and bonds have only been a good hedge in recent years. Rebalancing strategies: periodic rebalancing is similar to being short vol (short straddles). periodic rebalancing can lead to deeper underperformance if there is no mean reversion in relative prices. They advocate for delaying the rebalance until the trend is in favor of the rebalance (strategic rebalancing). This is very intuitive to me. The rate of accumulation should match the investment horizon. If you are harvesting long term risk premia, then the investment is not urgent because it can go either way in the short term. If a tactical indicator (such as trend-following) turns positive then the purchase is more urgent and the rate of accumulation needs to be increased. For me, this book is part of a project to understand different asset allocation (and portfolio construction) strategies. I am quite disappointed so far by the theory and assumptions behind some of the more recent common allocation tools. Bridgewater's risk parity and the original idea behind mean-variance have interesting theoretical foundations but the addition of tail hedging, trend-following, vol-scaling, active vol, rebalancing strategies seems ad-hoc. The asset management industry seems to add new asset allocation tools based on what has worked historically rather than advancing the theory of portfolio and risk management. This book has helped me see that the industry is stuck. ## Key Ideas ## Related - [[Asset Allocation]] - [[Trend Following]] - [[Portfolio Construction]]