Risk Management

Thorpe Abbotts is focused on earning high rates of absolute, risk-adjusted returns, where we define risk as the probability of permanent capital impairment.

We believe risk management should strive to produce investment results impervious to market forces. Understanding how to build a portfolio of mispriced securities with uncorrelated critical factors and catalysts 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 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 idiosyncratic exposure
  • 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
Investment strategy