Portfolio Costruction and Risk Management

  • Equity
  • Credit

The portfolio construction process is inseparable from the risk management process and centers on a conviction-based daily optimization of the overall portfolio and the avoidance of unintended exposures.

Two Key Objectives:

   1. Optimize stock selection and weightings to generate alpha relative to benchmark
   2. Avoid non-value added portfolio risk

Variables            Portfolio

Market Breadth

 
  • May determine number of portfolio holdings — more names in a broader market advance, fewer as breadth contracts/narrows

Sector/Country/Regional/
Themes

 
  • Strategies are not benchmark constrained
  • Stock selection will generally vary considerably from the benchmark
  • Over/under/neutral weight sectors, countries and regions opportunistically and will vary based on the market environment
  • When investment themes are present, overweight exposure may be given to names with strong fundamentals that also benefit from macro related themes

Risk Factors

 
  • Using proprietary and non-proprietary overlay tools, we seek to reduce non-value added portfolio risk by monitoring and subjectively optimizing weightings to various risk factors

 

When we sell:

1. to take profits (trims and outright sales of positions).
2. as a result of a negative change to the investment thesis (fundamental or technical).
3. for other risk management (aggregate) portfolio construction considerations; and  
4. to make room for a more attractive idea.

 

 

Portfolio Construction

  • Highly liquid portfolio of a diversified basket of fixed-income securities
  • Rapid allocation of capital
  • Efficient risk management with limited leverage
  • Bottom-up security selection factoring in “micro” risk considerations (liquidity, pricing, capacity, volatility) and  “macro” risk considerations (correlations, margin, concentration)
  • Active short-side as a value add

 

Risk Management

The portfolio management team implements a variety of measures to manage the Funds’ volatility, limit the Funds’ drawdowns and mitigate operational risk.

Techniques

 

 

Quantitative



  • Monitor a variety of risk factors on a daily basis:
    • Interest rates
    • Credit spreads
    • Asset volatility
    • Equity exposure
  • Observe security correlations
  • Estimate bankruptcy risk
  • Evaluate credit risk using market spreads, not credit ratings

Qualitative

 
  • Observe the investor base of the Funds’ holdings
  • Attempt to predict market cycles that could be negative for the “themes” expressed in the Funds


Additional Controls

  • The Funds target a volatility level, as opposed to a stated return objective
  • Jun Leng, the Funds’ risk manager, works with the Portfolio Management Team but reports directly to the Assistant Director of Research
  • Emphasis on liquid securities enables the Portfolio Management Team to quickly reposition during market crises
  • Independent oversight provided by the Driehaus Compliance Department
  • Monthly portfolio snapshot provides shareholders with high level of transparency