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CARE/CEASA Roundtable on Managing Uncertainty and Risk

CARE/CEASA Roundtable on Managing Uncertainty and Risk Two distinguished Morgan Stanley “alumni” discuss how their management of risk and uncertainty has not only preserved but increased the profitability of their businesses. In both cases—one involving a commodities trading operation and the other a long‐short hedge fund—the key has been to find cost‐effective ways to “cut off the left tails” of the distribution by avoiding naked long or short positions and creating option‐like payoffs with limited downside. In the case of the hedge fund, the combination of longs and shorts with the use of other risk‐reducing strategies has enabled the fund's managers to produce twice the market's returns with only half the volatility (and only one losing year) during the 18‐year life of the fund. In the case of the commodities trading operation, the strategy is described as combining ownership of physical assets with the use of option pricing models to create what amount to “long gamma positions in the asset” that “produce payoffs regardless of whether the asset goes up or down in value.” http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Applied Corporate Finance Wiley

CARE/CEASA Roundtable on Managing Uncertainty and Risk

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Publisher
Wiley
Copyright
Copyright © 2011 Morgan Stanley
ISSN
1078-1196
eISSN
1745-6622
DOI
10.1111/j.1745-6622.2011.00323.x
Publisher site
See Article on Publisher Site

Abstract

Two distinguished Morgan Stanley “alumni” discuss how their management of risk and uncertainty has not only preserved but increased the profitability of their businesses. In both cases—one involving a commodities trading operation and the other a long‐short hedge fund—the key has been to find cost‐effective ways to “cut off the left tails” of the distribution by avoiding naked long or short positions and creating option‐like payoffs with limited downside. In the case of the hedge fund, the combination of longs and shorts with the use of other risk‐reducing strategies has enabled the fund's managers to produce twice the market's returns with only half the volatility (and only one losing year) during the 18‐year life of the fund. In the case of the commodities trading operation, the strategy is described as combining ownership of physical assets with the use of option pricing models to create what amount to “long gamma positions in the asset” that “produce payoffs regardless of whether the asset goes up or down in value.”

Journal

Journal of Applied Corporate Finance – Wiley

Published: Jun 1, 2011

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