Trio of quantitative investing experts publish "Strategic Risk Management: Designing Portfolios and Managing Risk"

The book presents a new risk management-led approach to portfolio design

19 April 2021

We are pleased to announce the release of a new book, Strategic Risk Management: Designing Portfolios and Managing Risk, authored by Sandy Rattray, Chief Investment Officer of Man Group and co-inventor of the VIX index; Professor Campbell R. Harvey, a leading financial economist and Investment Strategy Advisor to Man Group; and Otto Van Hemert, Director of Core Strategies at Man AHL, Man Group's systematic investment engine. In a world of heightened market uncertainty, the book calls for a prioritisation of risk considerations and shows readers how to integrate risk management into the core portfolio design.

While many active fund managers consider the risk management function to be a series of tripwires that are activated after the portfolio is in trouble, Harvey, Rattray, and Van Hemert demonstrate why it is detrimental to treat risk management as an afterthought and make the case for viewing risk management as inextricable from alpha generation.

Readers of the book will:

• Learn how to incorporate risk management into the core portfolio design;
• Gain a deeper understanding of concepts such as portfolio rebalancing;
• Acquire tools to achieve a more balanced return stream through volatility targeting of higher-risk asset classes; and
• Understand which defensive strategies offer the most reliable and affordable protection.

In an exploration of portfolio design, the book examines the performance of various investment strategies in stressful market conditions and highlights strategies that tend to mitigate portfolio drawdowns during adverse market events, namely futures trend-following and quality long-short stock strategies, as well as volatility targeting.

The authors also review operational strategies, such as portfolio rebalancing. They look at how routine mechanical portfolio rebalancing, for example to a 60/40 equity/bond mix, can increase drawdowns and portfolio risks. Instead they advocate for strategic rebalancing, a solution that is more closely attuned to market conditions.

Sandy Rattray, CIO of Man Group, says:

'The extreme market events of 2020 have again demonstrated that forecasting the next tail event is nearly impossible, and that we therefore should not be focused on predicting the next downturn but on designing our portfolios to be as resilient as possible through volatile markets. One of my core beliefs is that risk management is an equal partner to alpha generation, and asset managers should invest heavily in technology that empowers their risk management capabilities. We are pleased to share our deep expertise with the broader investor community, and believe the book will provide readers with a new, helpful framework to understand and implement strategic risk management techniques.'

Professor Campbell R. Harvey, Investment Strategy Advisor at Man Group, says:

'To date, the asset management field has largely overlooked the crucial role of risk management, often establishing it as a secondary, support function for investment teams. Our research provides an encompassing approach to managing risk in good, bad and ugly markets. We hope to change thinking: dynamic risk management is integral to successful portfolio design.'

The book's findings are based on five years of research and decades of market data and quantitative portfolio management expertise, and although much of the book's research was conducted pre-COVID-19, the market selloff in March 2020 offers a unique out of sample experiment that provides evidence supportive of the book's approach.

Further information on the book can be found here. All proceeds from this book will be donated to The Access Project, a non-profit organisation which supports students from disadvantaged backgrounds to access top universities through tuition and in-school mentoring.

Praise for Strategic Risk Management:

'This book takes risk seriously and gives it the consideration it deserves. Risk considerations can get short shrift in many ways. For example, historical returns typically are reported without reference to the risk taken to achieve them. Unfortunately, without a better understanding of the risk involved, it is difficult to estimate the likelihood that such (possibly fortuitous) returns can be repeated.'

Martin Leibowitz, President, Advanced Portfolio Studies LLC, and Senior Advisor to Morgan Stanley

'This book shows how to fully embed risk management into the portfolio management process as an equal partner to alpha. This should clearly be best practice for all asset managers.'

Jase Auby, Chief Investment Officer for the Teacher Retirement System of Texas

'This book shows the power of integrating risk and investment management, rather than applying risk management as an afterthought to satisfy set limits. I was pleased to shepherd some of the key ideas in this book through the publication process at The Journal of Portfolio Management.'

Frank J. Fabozzi, Editor of The Journal of Portfolio Management

'Financial markets today are quite different from those of the last century. Understanding leverage, correlations, tails and other risk parameters of a portfolio is at least as important as work on signals and alpha. In that sense, bringing risk management from 'control' to 'front office' should be a priority for asset managers. This book explains how to do it.'

Marko Kolanovic, Chief Global Market Strategist, J.P. Morgan