We have recently completed the latest overhaul of our trading risk management model which has resulted in a significant reduction in worst case losses. One reason for examining this issue yet again, is that we might have a couple of external investors getting involved and we will want to run their money at significantly lower levels of overall leverage and risk than we currently run for our own trading.
Our aim is that their risk will be no worse than about a -3% month balanced against a possible 20% annual gain. This is about one-fifth of the current leverage and is considerably better than the largest losses incured by the few hedge funds that trade as we do. The performance fee aspect of having external money also means that we can reduce our own risk while still making the same overall return (or alternatively, increase our own return).
The new procedures have been tested in great detail against the market conditions in the period from 2008 to present, which includes a number of difficult periods related to the credit crunch and the various Euro problems. On this basis, things look good.
A typical testing chart - the current FT 100