Sunday, September 11, 2011

Managing investment risk from the top

With the U.S. Federal Reserve’s QE2 stimulus efforts behind us, 2011 has become a year of divergent investment results. Illustrating the extremes are the performances of John Paulson’s main fund, which declined 34% through the end of August, while Ray Dalio's Bridgewater Associates is up 25%. Paulson’s firm, which manages $35 billion, was positive on an economic recovery, with bets on banks (ouch) and a fraudulent Chinese company (bigger ouch). Dalio’s $122 billion firm had a more negative economic view with positions in a broader set of asset classes.

MY TAKE: With global markets increasingly interconnected, investors need a global process to manage risk and identify opportunities. Unlike “bottom-up” stock picking approaches, which identify good and bad companies and investment themes, a global macro approach monitors changing trends in GDP growth, inflation, currency exchange rates, and changes in political structures and other public policy dynamics. Style based strategies, such as growth versus value, or large cap versus small cap allocation are less effective in managing loss.

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