Aeon Funds | Risk Management

Risk Management

Aeon believes risk management should be the centerpiece of any investment strategy seeking to preserve capital, generate attractive returns and survive long-term. As such, Aeon integrates risk management as the dominant feature and recognizes that loss containment is the key to investment success.

While capital preservation is a widely-stated goal, Aeon is unique in that it seeks to safeguard against common and uncommon risks alike. For if one fails to account for financial crises and rare, unexpected events, investors are vulnerable to substantial losses.

In addition to its goal of mitigating improbable risks, Aeon attempts to reduce or eliminate common hazardous factors found in many alternative investment strategies. Conventional wisdom assumes these risks are necessary to generate attractive returns. Aeon's research and experience belies this notion and further asserts that accepting them jeopardizes the long-term viability of any investment approach.

Plainly put, Aeon's investment process aims to reduce or eliminate risks that most often lead to poor performance.

Prediction Risk

Problem - No person or computer can consistently predict the future, yet some portfolio managers incur a host of risks (such as those listed below) and losses because they rely too heavily on the accuracy of their conjectures.
Solution - Base investment decisions on what is happening now, not on what is expected to happen. Participate broadly.
Benefit - Avoid losses from misguided predictions and participate in performing assets even as prices surpass previous forecasts.

Conviction Risk

Problem - Sometimes portfolio managers refuse to liquidate poorly performing investments because they are convinced that they are right and the markets are wrong. However, markets can remain "irrational" longer than one can remain solvent.
Solution - Liquidate poorly performing investments quickly and objectively using predefined risk budgets and trailing stop losses.
Benefit - Be better-positioned to survive difficult markets by containing risk and adhering to a disciplined portfolio management process.

Concentration Risk

Problem - Lopsided exposures can lead to disproportionate and debilitating losses.
Solution - Remain reasonably impartial and diversify among and within asset classes.
Benefit - Avoid having a few poor investments ruin performance.

Leverage Risk

Problem - Some portfolio managers attempt to make small opportunities into large opportunities by replicating trades with borrowed money. However, if borrowing is excessive and opportunities turn into losing ventures, one can incur exaggerated loses.
Solution - Contain leverage by limiting the total amount of risk that can develop within a portfolio.
Benefit - Avoid outsized loses stemming from excess leverage.

Liquidity Risk

Problem - Many alternative investment strategies subject investors to steep losses by simply trying to exit illiquid investments.
Solution - Ensure assets satisfy minimum liquidity thresholds such that one can enter and exit near prevailing prices in a timely manner.
Benefit - Avoid losses from illiquidity.

An investment approach is only as good as the risk management process that governs it. As evidenced by average asset management returns in 2008, perpetual exposure to high risk factors (even those perceived as unlikely) eventually produce extremely poor results. By avoiding the aforementioned risks, Aeon seeks to produce attractive returns for investors regardless of market conditions.