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Using Technical Analysis To Manage Risk And Maintain Top Quartile Performance
Recent market reversals brought about by the Sub-Prime mortgage melt down is clearly a significant market correcting event. No matter if you work in the risk department of a large bank with many employees or a small fund of funds as co-manager, you share the same basic concerns regarding the management of your portfolio(s).
1. how to maintain top quartile performance;
2. how to protect assets in times of economic uncertainty;
3. how to expand business reputation to attract new client assets;
It remains common in the financial industry to hear experienced Portfolio Managers state their risk management program consists of timing the market using their superior asset picking skills. When questioned a little further it becomes apparent that some confusion exists when it comes to hedging and the use of derivatives as a risk management tool.
Risk management analysis can certainly be an intensive process for institutions like banks or insurance companies who tend to have many diverse divisions each with differing mandates and ability to add to the profit center of the parent company. However, not all companies are this complex. While hedge funds and pension plans can have a large asset base, they tend to be straight forward in the determination of risk.
While Value-at-Risk commonly known as VaR goes back many years, it was not until 1994 when J.P. Morgan bank developed its RiskMetrics model that VaR became a staple for financial institutions to measure their risk exposure. In its simplest terms, VaR measures the potential loss of a portfolio over a given time horizon, usually 1 day or 1 week, and determines the likelihood and magnitude of an adverse market movement. Thus, if the VaR on an asset determines a loss of $10 million at a one-week, 95% confidence level, then there is a 5% chance the value of the portfolio will drop more than $10 million over any given week in the year. The drawback of VaR is its inability to determine how much of a loss greater than $10 million will occur. This does not reduce its effectiveness as a critical risk measurement tool.
A sound risk management strategy must be integrated with the derivatives trading department. Now that the Portfolio Manager is aware of the risk he faces, he must implement some form of risk reducing strategy to reduce the likelihood of an unexpected market or economic event from reducing his portfolio value by $10 million or more. 3 options are available.
1. Do nothing - This will not look favourable to investors when their investment suffers a loss. Reputation suffers and a net draw down of assets will likely result;
2. Sell $10 million of the portfolio - Cash is dead money. Not good for returns in the event the market correcting event does not occur for several years. Being overly cautious keeps a good Portfolio Manger from achieving top quartile status;
3. Hedge - This is believed by all of the worlds largest and most sophisticated financial institutions to be the answer. Let's examine how it's done.
Hedging is really very simple, and once you understand the concept, the mechanics will astound you in their simplicity. Let's examine a $100 million equity portfolio that tracks the S&P 500 and a VaR calculation of $10 million. An experienced CTA will recommend the Portfolio Manager sell short $10 million S&P 500 index futures on the Futures exchange. Now if the portfolio losses $10 million the hedge will gain $10 million. The net result is zero loss.
Some critics will argue the market correcting event may not happen for many years and the result of the loss from the hedge will adversely affect returns. While true, there is an answer to this problem which is hotly debated. After all, the whole purpose of implementing a hedge is because of the inability to accurately predict the timing of these significant market correcting events. The answer is the use of technical analysis to assist in the placement of buy and sell orders for your hedge.
Technical analysis has the ability to remove emotional decisions from trading. It also provides the trader with an unbiased view of recent events and trends as well as longer term events and trends. For example, a head and shoulders formation or a double top will indicate an important rally may be coming to an end with an imminent correction to follow. While timing may be in dispute, there is no question a full hedge is warranted. Reaching a major support level might warrant the unwinding of 30% of the hedge with the expectation of a pull back. A rounding bottom formation should indicate the removal of the hedge in its entirety while awaiting the commencement of a major rally.
It is evident that significant market correcting events occur infrequently, in the neighbourhood of every 10 to 15 years. Yet many minor corrections and pullbacks can seriously damage returns, fund performance and reputation.
If you have ever been confronted with upcoming quarterly earnings or a topping formation which has caused you to consider liquidation then you should have first considered a hedge used in conjunction with the evidence from a well thought out analysis of technical indicators. Together they are a powerful tool, but only for those who have the insight to consider asset protection as important as big returns. I guarantee your competition understands and so does your clients who are becoming more sophisticated each year. It's important that you do too.
Dwayne Strocen is a registered Commodity Trading Advisor specializing in analyzing and hedging Market and Operational Risk using exchange traded and OTC derivatives. Website: http://www.genuineCTA.com.
View in depth information about Who We Are and the benefits of hedging your risk.
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CHICAGO – There is a tradition within the African American community during weddings. It stems from the past, when marriage was deemed illegal for the race, and provides the title for a new film, ball dresses “Jumping the Broom.” The now symbolic gesture is the basis for a clash between families and social classses in one seriocomic marriage weekend.
The situation immediately engages by putting a new spin on an old situation, the interaction between a bride and groom’s families. In this scenario the bride’s family is overtly wealthy, while the groom has a more middle class structure. Misunderstandings spring from this distinction, but also the truths that are revealed become more stark in light of the emotional wedding sensitivity, with a lot of decent laughs thrown in.
Sabrina Watson (Paula Patton) makes a promise in prayer that she will not sleep with another man unless it is on her wedding night. This sets up the meet-cute between her and Jason Taylor (Laz Alonso) – she runs him down with her car – and a relationship blossoms where somehow Jason goes along with the promise. Five months into the coupling, Sabrina gets a big promotion and a move to China, so Jason pops the question and the wedding is on.
This causes a bit of a problem as Jason’s mother (Loretta Devine) who has missed an earlier opportunity to meet Sabrina’s parents (Brian Stokes Mitchell and Angela Bassett). will only get that first meeting on the weekend of the wedding, a tony affair at the Watson family home in the Hamptons. Mrs. Taylor’s middle class roots clashes with the Watson wealth, and it doesn’t help that she has gone through anger management classes.
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Betrothed: Laz Alonso (Jason) and Paula Patton (Sabrina) in ‘Jumping the Broom’
Photo credit: TriStar Pictures
Family and friends gather. Willie Earl Taylor (Mike Epps), Jason’s uncle, brings his devil-may-care attitude into the fray, while the bride’s young cousin Sebastian (Romeo) has eyes for Mother Taylor’s older best friend Shonda (Tasha Smith). Sabrina’s bridesmaid, Blythe (Meagan Good), starts making time with the catering chef (Gary Dourdan), flower girls dresses flower girls dresses and Sabrina’s Aunt Geneva (Valarie Pettiford) comes with some baggage ball gown , and it isn’t contained in her suitcases.
All of these events swirl around the couple, who with their short time together start to feel the pressure as the big moment arrives. If they can survive their relatives and some inopportune secrets bridal dresses , maybe they will jump the broom.
The broom actually becomes the implement of contention, as Jason’s mother wants it in the ceremony and the couple want their own traditions, which doesn’t include the jump. There is a somewhat shocking encounter during the rehearsal dinner where this conflict is argued, when Angela Bassett’s Mrs. Watson contends that her family actually owned slaves. This is the kind of different spin the movie has, making points of pride in class warfare rather than cultural diffences. In a way it shows how African American life has evolved post the civil rights era.
The ensemble cast is strong and have a lot of fun. The former Lil’ Romeo does a good job with the May-December tease, even when the joke wears thin. Loretta Devine’s Mother Taylor rises above the unreasonableness that the script generates for her and deftly portrays the guilt of pushing a point-of-view too far. Angela Bassett plays the posh Mom with an icy resolve, projecting strength in the face of some burdensome secrets. Even when the narrative atmosphere becomes tense homecoming dresses homecoming dresses, the direction of the cast by Salim Akil creates an air of lightness in celebration.
Religion plays a larger role in this film than others, with one of the film’s producers part of a mega-church in Dallas (T.D. Jakes, wedding gowns for europe wedding gowns for europe who also has a small role as a preacher). Faith is on display, but not overwhelmingly so, more in the sense of how important the relationship with a higher power is for the lives of the characters, and is portrayed in the story as positive. How this trend will play out in other forms of entertainment outreach is to be determined, but in this film religion is integrated as a the tradition of heritage and family.
Two generations removed from the struggle for civil equality for African Americans, there are overt signs through the wedding weekend of the issues that have arisen from educational, moral and monetary divides within the community. Nobody in the story is looking down at anyone in the mingling of relations, evening formal dresses evening formal dresses but there are certainly distinctions to be made on all levels based on the station of life each individual has achieved, wedding dresses as in Dr. King’s dream to judge everyone based on the content of character. Doing the right thing involves empathy for each other within this wedding party wedding party , which in the end is the simple milk of human kindness and forgiveness, because we all have problems.
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Relations: Mike Epps (Uncle Willie Earl) and Valarie Pettiford (Aunt Geneva) in ‘Jumping the Broom’
Photo credit: TriStar Pictures
Jumping the Broom isn’t perfect, the bride and groom characters take a back seat to the tensions created by the mothers, and come off blowing in the wind emotionally in their reactions. This proves, as in most weddings, it is the background circumstances that become more prevalent than the ceremony itself. There is also a little too much piled on in the narrative, and the resolutions are quick, perhaps quicker compared to how serious some of these problems are. In the end, it’ sexy prom dresses ;s about what the title of the film means, and moving on.
And as a tale of the ramifications of family and relationships, Jumping the Broom does succeed, and has some winking-at-the-camera fun at the same time. For all the religion, familial politics and complications generated, how they all come together becomes the very definition of what family is.
“Jumping the Broom” opens everywhere on May 6th. Featuring Angela Bassett, Paula Patton, Laz Alonso, Loretta Devine, Tasha Smith, Valarie Pettiford, Mike Epps, Brian Stokes Mitchell and Romeo. Screenplay by Elizabeth Hunter and Arlene Gibbs, directed by Salim Akil. Rated “PG-13.” Click here for zoodress.com’s interview with Angela Bassett of “Jumping the Broom”
© 2011 Patrick McDonald, zoodress.com
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