Risk Management

DISCLAIMER: THERE IS NO WARRANTY THAT OUR RISK MANAGEMENT STRUCTURE WILL PREVENT DAMAGES OR WILL BE EFFECTIVE IN MANAGING ALL THE RISKS PRESENTED HERE.

The preservation of our clients’ capital and quality risk management is of the utmost importance to us.

Therefore, we have developed a strict risk management system that controls various types of risks to keep them within established limits.

Market risk is the possibility of losses that arise as a result of unfavourable changes in market prices.It is usually measured by the volatility of the instruments held in the portfolio and is classified according to equity, interest rate, foreign exchange and commodity risk depending on the types of asset classes in which the portfolio is invested.

To control our market risk, our automatic risk management technology periodically monitors volatility in our investment portfolio and balances it accordingly to keep it within predetermined levels set by the investment committee.

Credit risk, also known as counterparty risk, is the possibility of losses arising from the failure of a borrower or counterparty to make required payments. We are also exposed to credit risk. This occurs when counterparties hold our investment capital in custody, including our main brokers and custodians.

To track credit risk, our team constantly checks our counterparties. We control that our exposure to credit risk is within predetermined limits. Also, we strive to establish relationships with several counterparties to reduce our financial risks concerning one particular organization.

Operational risk is the probability of incurring losses as a result of deficiencies or errors in internal processes, technological systems, or as a result of external influences. In particular, because we rely heavily on trading algorithms to execute our systematic investment strategies, operational risk can arise from failures in our investment algorithms and errors in the design of our technology.

To minimize operational risk, the FOBs team conducts a rigorous testing process of our technology and invests in new investment products using equity for an initial period before a new investment product is offered to our clients. Since most of our investment technologies are our own patented development, we have full control and the ability to respond quickly if changes are required in our trading algorithms. Besides, our team periodically reviews our backup and disaster recovery procedures to minimize the downtime of our investment technologies and operations.

Liquidity risk is the likelihood that, over a certain period of time, a particular financial asset will not be able to trade quickly enough without significantly affecting the market due to the absence of buyers or sellers. This situation arises, in particular, with alternative investment managers, such as private equity and venture capital companies that invest in private equity or debt securities, or with hedge funds that trade illiquid and more exotic securities.

We try to minimize liquidity risk by investing the majority of our capital in government investment products that are traded on regulated exchanges and meet certain criteria in terms of liquidity and trading volume.

Margin risk is the possibility of incurring losses due to collateral requirements from a broker and subsequent liquidation of positions due to lack of capital required to maintain investment positions open. In our case, margin risk arises from the fact that our investment strategies use derivatives with built-in leverage due to the use of margin financing.

To minimize the risks of margin and leverage, we require our clients to fund their investments appropriately in our funds. Investing enough capital helps to minimize margin risk.

Execution risk is the risk associated with obtaining a different transaction price from the moment the investment decision is made until its effective execution. This is due to many reasons, such as human delays in the execution of an investment decision in the case of discretionary investment managers or the need to reduce market influence due to insufficient liquidity of a traded financial instrument in the case of large institutional investors.

We try to mitigate this kind of risk by using automated execution algorithms that try to capture investment opportunities as soon as they arise.

Asset class risk is the potential for loss due to the concentration of a portfolio in a particular asset class. This risk typically arises in some hedge fund strategies such as long-term stock sales, loans, convertible bonds, merger arbitrage, active investors and traders who only invest in certain asset classes. The main components of a given security’s return, measured by its beta, are due to systemic factors affecting a particular asset class. Previous investment entities are usually overly exposed to risks affecting a particular asset class at a particular time. But with the appropriate derivatives, you can hedge your assets by hedging your market risks.

We aim to reduce exposure to asset class risks by investing in multiple strategies and imperfectly correlated products spanning multiple asset classes, including stocks, fixed income, commodities, currencies, and volatility.

Sector risk is the risk associated with investing in a specific market sector such as technology or biotechnology. This type of risk is prevalent in industry-specific equity and credit hedge funds, or in venture and private equity firms that are highly influenced by the tech sector.

In order to minimize sector risk, we aim to place capital globally in multiple asset classes and different capital sectors through a diversified portfolio.

Geographic region risk is the potential for losses due to the concentration of investments in a specific geographic area. This type of risk is prevalent in hedge funds and alternative investment managers targeting a specific geographic region such as North America, Europe, the developed world, or emerging markets.

To reduce the risk of the geographic region, we invest globally in various public exchanges and investment products around the world.

Asset class risk is the potential for loss due to portfolio concentration in a particular asset class. This risk usually arises in some hedge fund strategies such as long-term stock sales, loans, convertible bonds, merger arbitrage, active investors, or traders who only invest in certain asset classes. Because the major components of a particular security’s return are due to systemic factors affecting a particular asset class as measured by its beta, previous investment entities are usually overly exposed to risks affecting a particular asset class over a given period of time, if only they hedge their market exposures with related derivatives.

We aim to reduce exposure to asset class risks by investing in multiple strategies and imperfectly correlated products spanning multiple asset classes, including stocks, fixed income, commodities, currencies, and volatility.