Risk Management

Home / Risk Management

The key to sustainable profitable returns on investment is successful risk management, however it is widely accepted that in the majority of cases, attempting to achieve a higher yield (Return on investment) is usually accompanied by taking larger risks. Many fund managers take this consideration too much to heart and for numerous reasons (be it vanity, ego or symptoms of group think) demonstrate a risk appetite that is not warranted.  Even if one has a profitability ratio of 90% of investments generating profit, such a practice is not sustainable if losses are disproportional when things do not work out. Consider the following illustration which demonstrates the flaw of averages.

When one actually visualizes it is easier to understand how so many macro funds were already down 10% YTD for 2016 by the end of January 2016. In short, their calls did not work and due to a failure to manage risk, the losses were brutal.

At Tajaraz, we manage risk through a combination of investment philosophies:

1.) Less is more: Never more than 1% of the entire portfolio is invested in a single investment. This “less is more” approach protects us and our clients from adverse market moves against our investments while still affording us the opportunity to get returns. In addition

2.) Contingency planning: All investments are made with a clear exit strategy to realise maximum profit where possible and reduce losses when investments do not work as planned. This is achieved through a combination of strict SL’s, Options and Hedging.

3.) Slow and steady is a winning strategy: To quote the great William Shakespeare “Wisely and slow. They stumble that run fast”. At Tajaraz, we believe in long term sustainability and building up profit over the course of the year through compounding respectable profitable investments. We do not believe in one “Big Short”. To many this might seem too conservative but consider the following situation. Rather than a single big gamble, consider if an individual made a series of investments every week in the high capital marketswith the net result of a 2% gain at the end of the month. By itself this looks immaterial and not impressive, yet if you consider this over the longer term, such performances would generate the following returns:

After 1 year: 1.02^12 = 26.8% gain.

After 2 years: 1.02^24 = 60% gain.

After 5 years: 1.02^60 = 228% gain.

This approach looks far more attractive when you consider the current risk free rate, which on US Government 10 year bonds currently stands at 2.21% (As of June 28th 2017).