Risk Management Update - September 2019

Risk management is a key source of value for the Best Ideas investment strategies. Both Best Ideas strategies use a combination of stop losses, trailing stops and profit stops to dynamically manage risk.

All other things being equal, stops should be tighter during periods of low volatility. The stops won’t be triggered if the market sticks to its current trend. But they will be triggered sooner if the behaviour of the market suddenly changes.

The chart below shows the S&P 500 index, its 20-day moving average (dotted line) and two Keltner bands (red and blue lines). Keltner bands adjust dynamically to changing market direction (i.e. the slope of the moving average) and volatility (i.e. the size of the bands).

Volatility is serially autocorrelated. In other words, low volatility is usually followed by more low volatility and vice versa.That is of course until the volatility regime changes, at which point extremes in the opposite direction occur.

Stops were re-set as part of the August portfolio rebalance (following the release of Q2 13F data). Several stocks were sold during September because their stops were triggered. This was due primarily to the style-rotation in early-Sept (read more HERE) and stock specific reasons.

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