RISK MANAGEMENT

An integral part of the investment process
At Hasley we do not regard risk management as an exercise superimposed on the investment process after the event but rather as an integral part of the investment process. It is one of the hallmarks of Hasley that our basic model portfolio is designed to control risk. This distinguishes Hasley from other managers who invest predominantly in long only equities and bonds with all the inherent exposure to beta.

Diversification
Hasley’s first step in investment/risk management is diversification, i.e. using a wide range of asset classes which historically have not shown a positive correlation of performance. Within our equity exposure international diversification reduces volatility. Our investment trusts and funds of hedge funds do have some slight equity market correlation but essentially are un-correlated assets. Likewise, property has been an excellent diversifier.

We monitor bond products which have performance independent of other asset classes in terms of performance. And there are other asset classes which will not perform in line with traditional equity markets: carefully selected zero coupon preference shares of well managed split capital investment trusts; investment trusts investing in endowment policies (with no expectation of future bonuses); structured products; forestry; agricultural land and precious metals.

We do not pretend that we have eliminated the problem of correlation of returns between asset classes but we believe that the wide spread of asset classes used is likely to produce a less volatile performance than that of the long only managers.

In our UK balanced model non-correlated assets currently amount to 32.5%.

Diversification amongst the underlying managers
Correlation analysis between funds assumes that past correlations are a guide to future correlations, which is not necessarily the case. Nevertheless we like to know if funds within a Hasley portfolio are likely to serve the same purpose. For example, it may be desirable to be exposed to more than one range of hedge fund strategies. But on the other hand, why not reduce the risk that something goes wrong with a particular manager? A recent example was the purchase of two separate equity income managers with very similar historical performance. Equally, we are closely in touch with some product companies, whose funds could satisfy Hasley’s needs across a wide range of asset classes; nevertheless we prefer to achieve our exposure to these asset classes through a broader range of managers.

In our diversification process we are also keenly aware that the extrapolation of historical correlations is not always a reliable guide to the future, especially in times of market turmoil.

Investment trusts and funds of funds
In some asset classes we prefer to buy a fund rather than the asset itself. For example, we do not regard a “hedge fund” as a fund but rather as a company which happens to trade in financial instruments. Just as we would not buy an individual equity we would not buy an individual hedge fund. We prefer to enjoy the skills of the fund of hedge funds manager, as well as the implicit diversification which this introduces. (The principle is the same for the investment trusts used for U.K. net investors, although we are acutely aware of the need to be aware of the risks of buying at a premium and of the need for proper discount management mechanisms.) We are likely to adopt a similar approach within other asset classes such as private equity and property.

Acceptance of risk
Risk is not always to be avoided. For example, if a substantial part of a portfolio is in low risk assets, then the investment manager is justified in increasing his risk appetite for the remainder if he sees assets which are likely to perform well: an approach similar to portfolios constructed of bond/warrant combinations. Indeed, if the manager has a very strong conviction that a particular asset will perform well, he should buy it subject to constraints of suitability within the portfolio overall.

Manager Research
Hasley endeavours to be well informed about the managers it uses, by means of desk-top research, industry comments and direct contact with the managers themselves. Analysis includes all the obvious areas such as faithfulness to investment management philosophy and process; review of risk adjusted returns, manager continuity etc. Hasley also looks at much more subjective measures such as the compatibility at a human level of the manager with the Hasley team. We hope that this filter will help to avoid accidents. We also like managers who themselves have a properly articulated (and implemented) approach to risk. We regularly review the results of a manager and an absolute or relative fall of 5% is likely to provoke discussion within Hasley and probably with the manager, unless accounted for by the manager’s own reporting.

Overview
Portfolios are regularly reviewed by the Hasley partners to answer the critical questions: will the chosen mix of assets be likely over time to outperform cash; are portfolios suitable for clients; are portfolios exposed to risks of concentration?

Investment is not a riskless exercise but the Hasley approach is to try to know where risk exists and keep it within manageable proportions.