Risk Management Framework
At BlackPearl we believe that there are various layers of risk that all equity investors are subject to which need to be carefully managed. These include idiosyncratic risk or stock specific risk, beta risk which just means market risk and what we define as strategy risk. Most investors are aware of stock specific risk and market risk. Investors reduce stock specific risk by diversifying their portfolio among many stocks however they are generally exposed to market risk and have no way to diversify this risk away.
Additionally, the majority of investors are exposed to strategy risk because they only employ one type of strategy. In cases where they do diversify among different strategies those strategies tend to be highly correlated. Given that even the best of best strategies will go through periods of poor performance we think it is critical that investors reduce risk by implementing numerous uncorrelated strategies in their portfolio.
The BlackPearl Masters Fund aims to minimise stock specific, market and strategy risk. The Fund reduces stock specific risk by diversifying across many different individual positions through the underlying hedge funds it invests in. The Fund reduces market risk by constructing a portfolio that is simultaneously exposed to both long and short positions which significantly reduces the impact the general market has on performance. Lastly but we think most importantly the Fund aims to diversify the portfolio among various diverse strategies that generate returns under different market conditions. This is something that we define as “true diversification” and see as an important differentiating factor in our investment approach.