Alternative Title: How to Avoid Bad Manager Timing
Strategy Risk: If you own a black-box ‘go-anywhere’ hedge fund that invests long and short, uses futures and derivatives at any frequencies, you are mostly exposed to the strategy risk.
Asset Risk: On the other hand, if you buy and hold S&P500 for the long-run, you are mostly exposed to the underlying asset risk.
Volatility is how much something moves up and down. The stock market is more volatile than the bond market, on average. Yet, a black-box hedge fund might be less volatile than S&P500, but is it less risky?
A Story About Unexpected Risk.
It was at the beginning of 2008, at our downtown office on Pine Street in Manhattan. I was a young quant portfolio manager at AIG and I was standing in the office of one of my mentors, a talented senior portfolio manager who was looking nervously at his screen.