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CARE/CEASA Roundtable on Managing Uncertainty and Risk
Author(s) -
Harris Trevor,
Shear Neal,
Galbraith Steve
Publication year - 2011
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2011.00323.x
Subject(s) - downside risk , hedge fund , volatility (finance) , profitability index , investment management , business , financial economics , performance fee , hedge , index fund , trading strategy , economics , actuarial science , finance , fund administration , fund of funds , open end fund , portfolio , market liquidity , institutional investor , corporate governance , ecology , biology
Two distinguished Morgan Stanley “alumni” discuss how their management of risk and uncertainty has not only preserved but increased the profitability of their businesses. In both cases—one involving a commodities trading operation and the other a long‐short hedge fund—the key has been to find cost‐effective ways to “cut off the left tails” of the distribution by avoiding naked long or short positions and creating option‐like payoffs with limited downside. In the case of the hedge fund, the combination of longs and shorts with the use of other risk‐reducing strategies has enabled the fund's managers to produce twice the market's returns with only half the volatility (and only one losing year) during the 18‐year life of the fund. In the case of the commodities trading operation, the strategy is described as combining ownership of physical assets with the use of option pricing models to create what amount to “long gamma positions in the asset” that “produce payoffs regardless of whether the asset goes up or down in value.”