Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks

Afterword

If you only have a hammer, you tend to see every problem as a nail.

—Abraham Maslow

Risk management is a tool. Like all tools, it is better suited for some jobs than other jobs. At the end of the day, whether risk management helps or hurts an organization depends on how it is used. Some firms use risk management techniques as a core part of their business and find great benefit from it. For others, it is a waste of time and resources that creates as many problems as it prevents.

Risk management is most effective when decisions that might be made differently are altered as a result of analysis. If decisions or behavior won’t change, the analysis is largely wasted. Because of that, one of the ways to effectively use risk management is to focus on the decisions that might be affected. Some of those decisions include:

• Avoidance. For some risks, deciding to stay away is the best possible outcome. Companies often fall into the trap of trying to do everything. It is often better for them to focus on the areas where they have a competitive advantage.
• Control. Risk can come from unpredictable markets or unpredictable employees. A comprehensive plan to proactively identify and manage risks can help. However, it only helps if the monitoring is used.
• Transfer. Transferring risk can substantially improve a firm’s risk profile. Unfortunately, if done poorly, this can lead to worse results or substitute a guaranteed loss for an uncertain profit.
• Acceptance. Some risks are not ...