The economy and financial markets remained rangebound in the fourth quarter, after a year of historic shocks including surging inflation, the outbreak of war in Europe and sharply tighter monetary…Continue
It’s not difficult to minimize uncertainty but most investors leave valuable opportunities on the table in the process. That’s why risk management can’t just be about eliminating volatility; it must also be about illuminating opportunity.
At Rain Capital, we use our understanding of risk to drive opportunity
Perceptions about risk are often incorrect, causing investors to be overly conservative in the wrong places and too aggressive elsewhere. At Rain Capital, we believe opportunity presents itself when risk is misjudged by the broader market. Early explorers bucked the conventional wisdom of their time by using the most modern science available to dispel certain dangers – sailing across a flat earth, for instance – and to prepare for other, more real dangers – ensuring the crew would have enough rations to make it across the globe. This type of methodical homework and preparation obviously paid off.
Investing today has become infinitely more complex and even more prone to error. The response has been to use the crude tool of asset allocation, which treats uncertainty as an unknown, the great void at the edge of the earth. Not knowing what could go wrong, investors attempt to diversify by spreading assets across a myriad of investments hoping to avoid having all their eggs in one basket. This is the conventional wisdom of our time, a shortcut that fails to appreciate how these various baskets are connected.
Investment managers who follow this conventional wisdom may end up being too cautious, foregoing opportunities. Yet others, overconfident in the safety promised by these tools, take reckless wagers that asset allocation was never intended to mitigate. When volatility does rear its head – whether as a currency crisis, a dot com collapse, or as a global credit crisis – conventional portfolios are poorly prepared to deal with the specifics of each situation.
At Rain Capital, we believe that in the pursuit of opportunity, we shouldn’t have to choose between navigating close to the shoreline and riding aboard the Titanic. Rather, we use the most modern tools available to more accurately define the exposures we want to take and to avoid the unnecessary ones. Still further, these tools allow us to better control real risk far more effectively than conventional diversification approaches.
At Rain Capital, we use data to better understand where risk is building up and diversification is dwindling. In doing so, we can better differentiate between assets that are truly valuable and those that may appear so but are vulnerable to broader economic forces. Charting opportunities then becomes a process, not of erring on the side of being conservative or aggressive, but of mapping out the contours of the market such that we can mitigate the true dangers and capture opportunities along the way.
In doing so, we ensure that knowledge, rather than convention, illuminates the course to opportunity and that risk is an active choice, not the by-product of faulty portfolio construction. The payoff to our clients of this homework and preparation is better risk-adjusted returns and smoother sailing.