Designing Risk Strategies

The discussions about market failures over the last year and a half continues to focus on the lax risk parameters implemented by banks and brokerage institutions. The greater cause however was the type of talent involved in establishing investment strategies and how they inaccurately evaluated the risk scenarios. Proper assessments require enormous amounts of time, testing, and reviewing real-time day to day data in various sequential forms. Real dollar and opportunity costs are substantial but must be weighed against just simple risk evaluations or proper risk reviews that get it right. In order to create adaptive trading strategies scaled for success, several areas of operations must be tackled. Most importantly, they are, identifying the irreducible risks and designing performance standards the enterprise can execute. To many trades were constructed with foolish risk spread specs, which never had a chance to protect any assets in extreme markets.