Risk Control

Risk is mitigated in essentially three different ways: diversifying, cutting losses and - most importantly - controlling the size of positions.

While diversifying and cutting losses can bring down risk considerably, position size is far more important. Regardless of stop-loss orders and other mechanisms in place, there are many market events (known and yet unknown) that will render them fully ineffective, such as 9/11, the Lehman Brothers bankruptcy or the so-called "flash crash" of May 6, 2010.

The only protection mechanism remaining in these borderline situations where the "normal" rules of the game suddenly no longer apply, is position size. We cannot sufficiently emphasize the importance of the total net exposure of a portfolio. A leveraged or fully-invested portfolio would likely not survive the above mentioned incidents unscathed, while a conservatively sized portfolio would be expected to do so. In fact, a conservative portfolio would not only survive, but have enough liquidity to make full use of the opportunities that tend to expose themselves at times like that.

At Arnova Asset Management Ltd, all employees are taught about the dangers of leverage from day one.