Synopses & Reviews
It is an age-old maximand one that few would challengethat traders run the risk of crashing by taking on too much risk. But as Kenneth Grant asserts in Trading Risk, money managers and individual traders also suffer by not taking enough targeted risk. Small, profitable trades are fine, but theyll never harvest the substantial profits investors require to take their portfolios to the next level. What traders need is a reliable system for managing riskso they can confidently make the big investments they desire and achieve the results they deserve.
Kenneth Grant has managed portfolio risk for several of the worlds most elite, successful hedge funds. Now, he shares his trade secrets, showing how the aggressive trading that is the signature of leading hedge funds can be applied by traders at all levels without excessive risk. Trading Risk offers revolutionary yet practical techniques for real-world traders, not superficial theories or complex quantitative formulas. Grants proven scientific strategies are presented in accessible language any trader can understandand put into practice.
Many professional traders are constrained by firm-wide risk management rules that stifle major growth. Individual traders are often overwhelmed by books presenting quantitative formulas that practically require PhDs to implement. Both kinds of traders too often default to a loose collection of subjective rules of thumb. Grants system is a simple yet effective solutionand it strips away much of the subjectivity that makes major deals appear too hazardous for many traders.
Using an extremely simple set of statistical and arithmetic tools, Grant illustrates how to evaluate which portfolio elements are working and which are not. He then shows you how to control your exposureand prepare for inevitable periods of suboptimal performance without going bust. Grant also helps you interpret the statistical makeup of your portfolio, and discusses how to use these statistics to make decisions consistent with both your financial objectives and your constraints.
Trading Risk demonstrates that traders virtually always have control over their portfolios and that risk can be managed even during the worst market crisesfrom Enron to the tech bust. With this book in hand, youll be able to devise and execute a customized risk management strategy. Whatever type or level of trader you are, Trading Risk offers the key to dynamic investing that doesnt leave your assets out of control.
Synopsis
Revolutionary techniques that traders can implement to improve profits and avoid losses
No trader, professional or individual, can afford not to have a solid risk management program integrated into his or her trading system. But finding a precise mathematical model to replace subjective decision-making processes is a challenge. Traditionally, risk management has focused solely on loss avoidance, but in Trading Risk, hedge fund risk manager Kenneth Grant presents some-thing completely new—how to manage a portfolio to minimize risk and increase profits by putting more capital at risk. Trading Risk details a risk management program that can help both money managers and individual traders evaluate which elements in a portfolio are working efficiently and which aren’t. By illustrating an extremely simple set of statistical and arithmetic tools this book can help readers enhance their performance in many financial markets.
Kenneth L.Grant is Cheyne’s Global Risk Manager, and is the Managing Member for Cheyne Capital, LLC, the firm’s U.S. arm. Mr. Grant is a pioneer in the field of hedge fund risk management and capital allocation. Before joining Cheyne, he created risk control programs at two of the world’s leading hedge funds, Tudor Investments and SAC Capital, where he was eventually promoted to the title of Chief Investment Strategist. Mr. Grant holds a Bachelor of Science in Economics and Mathematics from the University of Wisconsin, an MA in Economics from Columbia University, and an MBA from the University of Chicago Graduate School of Business.
Synopsis
A revolutionary system for fearless trading without excessive risk
"Trading Risk provides a useful and intuitive roadmap of the risk management process, as written by an individual with unique experience and insight into this topic. It is an engaging read and covers complex subject matter in a straightforward and often-entertaining manner."
Stanley Shopkorn, Shopkorn Associates
"Ken Grant's eminently readable new book on risk management is a rare blend of theory and practical applications. It is a great starting point for the novice and deep enough for the experienced practitioner."
Mark R. Graham, Managing Partner, Blue Elite Fund, Ltd.
"This book describes a very practical approach to risk management in a lucid and entertaining manner. Anyone concerned with the topic of risk management ought to find it of interest."
Susan Estes, Managing Director, Countrywide Securities
"Thoughtful, unique, detailed, actually enjoyable, and comprehensible reading for what is normally a boring and confusing topic."
Dwight Anderson, President, Osprei Management, LP
"A must-read for risk managers of companies of all sizes who want to preserve capital and take practical advantage of trends in the marketplace. This is a clearly written, funny, and entertaining guide to a very serious topic that affects all corporations. This very complex topic was simplified and made easy to understand by a true expert in the art of risk management."
Phupinder Gill, Managing Director & President
Chicago Mercantile Exchange
Synopsis
Revolutionary techniques that traders can implement to improve profits and avoid losses
No trader, professional or individual, can afford not to have a solid risk management program integrated into his or her trading system. But finding a precise mathematical model to replace subjective decision-making processes is a challenge. Traditionally, risk management has focused solely on loss avoidance, but in Trading Risk, hedge fund risk manager Kenneth Grant presents some-thing completely new— how to manage a portfolio to minimize risk and increase profits by putting more capital at risk. Trading Risk details a risk management program that can help both money managers and individual traders evaluate which elements in a portfolio are working efficiently and which aren’ t. By illustrating an extremely simple set of statistical and arithmetic tools this book can help readers enhance their performance in many financial markets.
Kenneth L.Grant is Cheyne’ s Global Risk Manager, and is the Managing Member for Cheyne Capital, LLC, the firm’ s U.S. arm. Mr. Grant is a pioneer in the field of hedge fund risk management and capital allocation. Before joining Cheyne, he created risk control programs at two of the world’ s leading hedge funds, Tudor Investments and SAC Capital, where he was eventually promoted to the title of Chief Investment Strategist. Mr. Grant holds a Bachelor of Science in Economics and Mathematics from the University of Wisconsin, an MA in Economics from Columbia University, and an MBA from the University of Chicago Graduate School of Business.
About the Author
Kenneth L.Grant is Cheynes Global Risk Manager, and is the Managing Member for Cheyne Capital, LLC, the firms U.S. arm. Mr. Grant is a pioneer in the field of hedge fund risk management and capital allocation. Before joining Cheyne, he created risk control programs at two of the worlds leading hedge funds, Tudor Investments and SAC Capital, where he was eventually promoted to the title of Chief Investment Strategist. Earlier in his career, Mr. Grant led risk management efforts for the Chicago Mercantile Exchange and Société Générale. He is also a member of the Board of Directors of the Managed Futures Association (MFA), and is a founding member of MFAs Hedge Fund Advisory Committeethe industrys leading trade relations organization. He is a principal author of MFAs Sound Practices for Hedge Fund Managers (2000). Mr. Grant holds a Bachelor of Science in Economics and Mathematics from the University of Wisconsin, an MA in Economics from Columbia University, and an MBA from the University of Chicago Graduate School of Business.
Table of Contents
PREFACE.
ACKNOWLEDGMENTS.
CHAPTER 1: The Risk Management Investment.
CHAPTER 2: Setting Performance Objectives.
Optimal Target Return.
Nominal Target Return.
Stop-Out Level.
The Beach.
CHAPTER 3: Understanding the Profit/Loss Patterns over Time.
And Now to Statistics, but First a Word (or More) about Time Series Construction.
Time Units.
Time Spans.
Graphical Representation of Daily P/L.
Histogram of P/L Observations.
Statistics.
A Tribute to Sir Isaac Newton.
Average P/L.
Standard Deviation.
Sharpe Ratio.
Median P/L.
Percentage of Winning Days.
Performance Ratio, Average P/L, Winning Days versus Losing Days.
Drawdown.
Correlations.
Putting It All Together.
CHAPTER 4: The Risk Components of an Individual Portfolio.
Historical Volatility.
Options Implied Volatility.
Correlation.
Value at Risk (VaR).
Justification for VaR Calculations.
Types of VaR Calculations.
Testing VaR Accuracy.
Setting VaR Parameters.
Use of VaR Calculation in Portfolio Management.
Scenario Analysis.
Technical Analysis.
CHAPTER 5: Setting Appropriate Exposure Levels (Rule 1).
Determining the Appropriate Ranges of Exposure.
Method 1: Inverted Sharpe Ratio.
Method 2: Managing Volatility as a Percentage of Trading Capital.
Drawdowns and Netting Risk.
Asymmetric Payoff Function.
CHAPTER 6: Adjusting Portfolio Exposure (Rule 2).
Size of Individual Positions.
Directional Bias.
Position Level Volatility.
Time Horizon.
Diversification.
Leverage.
Optionality.
Nonlinear Pricing Dynamics.
Relationship between Strike Price and Underlying Price (Moneyness).
Implied Volatility.
Asymmetric Payoff Functions.
Leverage Characteristics.
Summary.
CHAPTER 7: The Risk Components of an Individual Trade.
Your Transaction Performance.
Key Components of a Transactions-Level Database.
Defining a Transaction.
Position Snapshot Statistics.
Core Transactions-Level Statistics.
Trade Level P/L.
Holding Period.
Average P/L.
P/L per Dollar Invested (Weighted Average P/L).
Average Holding Period.
P/L by Security (P/L Attribution).
Long Side P/L versus Short Side P/L.
Correlation Analysis.
Number of Daily Transactions.
Capital Invested.
Net Market Value (Raw).
Net Market Value (Absolute Value).
Number of Positions.
Holding Periods.
Volatility/VaR.
Other Correlations.
Final Word on Correlation.
Performance Success Metrics.
Methods for Improving Performance Ratios.
Performance Ratio Components.
Maximizing Your P/L.
Profitability Concentration (90/10) Ratio.
Putting It All Together.
CHAPTER 8: Bringin’ It on Home.
Make a Plan and Stick to It.
If the Plan’s Not Working, Change the Plan.
Seek to Trade with an “Edge”.
Structural Inefficiencies.
Methodological Inefficiencies.
Play Your P/L.
Avoid Surprises—Especially to Yourself.
Seek to Maximize Your Performance at the Margin.
Seek Nonmonetary Benefits.
Apply Liberal Doses of Humility and Humor.
Be Healthy/Cultivate Other Interests.
APPENDIX: Optimal f and Risk of Ruin.
Optimal f.
Risk of Ruin.
INDEX.