Takeaways from Strategic Risk Management

I have recently read this book from Man Group, about risk management, this is honestly the most interesting portfolio management book I have read so far, many things may not be new, but there are so many points are very different than other practices but convincing at the same time, it really leads me to think about it how to manage my portfolio and how to make it not beat the market in return but beat it in risk. If you want me to introduce this book in 1 sentence, I will say, it is a book to connect the quantitative analysis in portfolio management.

Key take-aways

• Risk and return are inseparable: The authors push the view that managing risk isn’t just about protecting capital but is integral to achieving return objectives. Risk management isn’t just “defend” but also “design”.

• Volatility targeting: Rather than fix exposure amounts, target a level of volatility in the portfolio (so that risk is more constant). This can lead to a more balanced return stream. Bol

• Drawdown control & defensive overlays: Use strategies that reduce the magnitude of losses in bad markets (for example, trend-following, quality long/short, hedges) rather than relying only on diversification or passive asset mixes. spe.org.uk

• Rebalancing with intelligence: Rebalancing should be strategic, responsive to market conditions, not simply “back to target” mechanically. The book shows that naive rebalancing can increase portfolio risk in downturns. spe.org.uk

• Integration across functions: The risk team and the portfolio construction team should work hand in hand. Risk shouldn’t live solely in “compliance” or “monitoring” but be embedded in the investment decision‐process. man.com

Some Actions to consider

1. Embed risk management into portfolio design, not as an afterthought
   The book makes the point that risk management shouldn’t be a separate function (“monitoring” or “compliance”) that kicks in after the fact; instead it should be integrated from the moment you design the portfolio. (Preface + Chapter 1). man.com
   Actionable: When designing a portfolio, ask: “Which strategies help protect in a crisis, and how much cost do they impose?” Don’t just pick asset weights and then tack on risk-limits later.

2. Use volatility targeting to stabilise risk exposure
   Rather than maintaining constant notional exposure to assets (e.g., always “$X in equities”), scale exposures so that the portfolio’s risk (volatility) stays within a desired band. This can smooth returns and reduce large drawdowns. spe.org.uk

   Actionable: Ask yourself: what is the expected volatility of each asset or strategy? Can I adjust exposure so that when volatility rises (or risk mode changes) I automatically scale down, rather than wait for a big loss?

3. Rebalance strategically rather than mechanically
   The authors show that simply rebalancing to target weights (e.g., 60/40 every quarter) can increase risk in stressed markets because you may be buying into weakness or re-investing into assets about to fall. Strategic rebalancing means using rules that recognise market state, momentum/trend signals, or risk regime. spe.org.uk

   Actionable: Design rebalancing triggers that incorporate volatility, drawdown signals or market regime indicators, not just calendar rules.

4. Focus on drawdown control and manager/strategy health
   Monitoring drawdowns (peak-to-trough losses) is crucial because large drawdowns not only destroy capital but can signal that the strategy or manager may have changed (skill decayed, capacity hit, regime change). Using drawdown metrics as part of risk governance can help. spe.org.uk

   Actionable: Establish drawdown thresholds (for example 15-20%) for your strategies or portfolio as a warning sign. When a threshold is breached, trigger review or reduction of exposure. Also ask: has drawdown behaviour changed relative to historical expectations?

5. Test your framework in real crisis/out-of-sample scenarios
   Frameworks that look good in normal markets can fail in a true crisis. The -2020 COVID-19 sell-off chapter shows how the authors’ strategies fared in that stress. So you should design your risk/portfolio framework with stress tests, out-of-sample events, tail risk scenarios. Wiley-VCH

   Actionable: Build “what-if” scenarios: large equity drawdown, rapid volatility spike, trend-reversals. Run your portfolio design or risk strategies through those to see how they behave, and adjust before the next crisis kicks in.