Risk Management Strategies I use in my Hedge Fund

By David Hobart
18 November 2008

Whilst building complex risk management algorithms may enhance performance, getting the foundation rules right will always make the biggest difference to your performance. As always, keeping things simple generally leads to the best results.

Overtime you will find the biggest difference in the performance of your trading results will come from specific risk management strategies as opposed to some fancy entry technique.

With this in mind, I always come back to my most important rule, drilled into me by my first trading mentor.

Rule 1 - Stay in the game

Never put yourself in a position where you can’t keep playing. Effective risk management strategies will ensure rule number 1 is never compromised.

Firstly, you need to clearly define what game it is that you are playing, and then outline the rules or parameters for playing that game.

For example, the game that I am playing in managing my Hedge Fund (www.apeiron.com.au) is to generate 15% plus net returns for my investors per annum over a rolling three year time period, without ever hitting a drawdown of 25%. If I were to hit a 25% drawdown, it would mean game over. Ie I would return the remaining funds to investors and close the fund.

Inside this game, I have a number of rules (risk management strategies), which assist me in achieving the game’s objectives. The first of which, is an 8% peak to trough drawdown rule, which if breached, results in me squaring up the portfolio and removing myself from the markets for two weeks. This rule gives me pause to review both my processes and myself. It can act as a circuit breaker to pessimism and would allow me to re-energise and come back into the game fresh and renewed.

Interestingly, since I have introduced this rule into my process, I have never gone into an 8% drawdown. Why is that do you think?

Because I view the 8% rule as one of the parameters to the game. And if I get sidelined for 2 weeks, I’m in a position where I can’t play the game, so it’s a breach of rule number one.

Which brings me to rule number 2.

Rule number 2 - Don’t break rule number 1.

Simple isn’t it? You will find that successful and profitable trading is more about capital preservation that making massive gains and hence staying in the game is critical if you are to have any sucess in the markets.

This is where commitment and responsibility come in. I am totally committed to achieving my stated objectives and take complete responsibility for my outcomes.

I don’t blame my systems, or the markets, or my mood, or my personal circumstances if something goes wrong with my trading. I don’t blame myself either; I learn from my mistakes and honour my commitment by getting back on the court. And it is because of this commitment and responsibility that I am still in the game and loving it.

If you would like to find out more about David Hobart’s trading coaching and mentoring programs, please email David at dhobart@traderemotions.com.au  .

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Disclaimer: The contents of www.traderemotions.com.au is general information only and in no way provides advice in a personal or general nature. David Hobart and his related entities can not be held responsible for any loss, cost or expense resulting from your activities related to the subject matter in this document and or relating to www.traderemotions.com.au

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