Introduction to Our Approach
We Differ from the Current Industry on the Definition of Risk
For decades, financial players, regulators, and academics have equated risk with uncertainty in the form of volatility or deviation around an expected mean return. Standard deviation, the square root of variance, has been the predominant measure of this definition of risk.
Volatility both incorrectly penalizes out-performance and measures out- and under-performance as equal when mathematically it is not (absolute dollars gained versus lost). In addition, all return distributions are not symmetrical, which is proven by empirical evidence.
Downside Risk Probability: Risk is loss of capital
When a client suffers losses, the capital base is eroded. A loss of 50% on capital will need to earn 100% on that new lower base to get back to the original dollar starting point. We hold this as the core driver of our approach, focusing on the high penalty suffered when there are portfolio investment losses while at the same time not preventing our models from participating in portfolio investment gains.