Risk Management
Thorpe Abbotts is focused on earning high rates of absolute, risk-adjusted return, where we define risk as the probability of permanent capital impairment.
We believe risk management should strive to produce high-absolute returns without significant single-stock risk. Understanding how to build a diversified portfolio of mispriced securities with the most convex risk/reward characteristics is crucial to achieving this goal.
A practical approach towards risk management…
- We believe that it is both foolish and counterproductive to try and distil risk into a single number like beta or value-at-risk
- A sensible risk management strategy should comprise an overarching philosophy towards risk that accounts for its numerous intricacies
- This philosophy should start with a definition of what risk is and what risk is not
…requires a practical philosophy towards risk management
- We believe that risk is the product of both the probability that an unfavorable outcome occurs and the size of the permanent capital impairment the portfolio will suffer given that unfavorable outcome. We do not believe that risk should be defined by an asset’s volatility or market covariance
- Reducing this risk at the portfolio level while maintaining active share requires a balance between appropriate diversification and targeted exposure to the factor of choice. In our case, that is unique exposure to ever-present human biases
- Being right more than wrong and capturing asymmetric upside are the secrets to maximizing risk-adjusted returns. Our entire investment process has been designed to optimize these two goals
