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Risk management and controls
GARS is expected to exhibit between one-third to one-half of the investment risk of a conventional, long-only, active global equities portfolio with a similar long-term return potential.
In managing GARS, the use of inflexible conventional asset allocation limits is eliminated. Instead, the individual contribution of each strategy to GARS' total risk is analysed and restrictions are set to ensure that no individual strategy dominates the risk profile. These restrictions perform similar to a strategic benchmark in that they prevent concentration of risk.
This approach offers four main benefits:
- investments may only be made where the risks are well analysed and understood
- by understanding how individual strategy risks interact, we can construct a truly diversified portfolio
- risk exposures can be communicated clearly and concisely
- it dynamically incorporates the continuously changing risk characteristics of the assets used, for a more consistent outcome.
Risk management activity is not restricted to the analysis of individual strategies. Effective monitoring of counterparty credit risk is an important element of managing GARS. As well as collateralising derivative positions daily in cash or G7 government securities to mitigate economic exposure, counterparties are also carefully examined and exposures are amended where necessary.