“Risk is like that. You stamp it out in one place, and suddenly it appears somewhere else.”

A Meditation on Risk appears in Fortune magazine:

Risk is like that. You stamp it out in one place, and suddenly it appears somewhere else. Bounteous evidence of this phenomenon can be found in finance. Hedge funds, for instance, are judged by their risk-adjusted performance. They adopt trading strategies that are likely to make money regardless of whether the overall market is rising or falling—betting, say, that similar securities will converge in price. Because there are so many funds doing the same thing, such trades are seldom very profitable. So to get a decent return, funds leverage their bets with borrowed money. The result is an investment vehicle that looks less risky—that is, less volatile—than a standard mutual fund but is in fact at far greater risk of blowing up if its trades go sour and its lenders want their money back. That’s what happened at Long-Term Capital Management, the famous hedge fund that collapsed in 1998.

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