risk rules that ignore p/l memory

I wrote this tweet a while back that bears repeating because I’m not sure if there’s any topic that seems to come up more when I’m asked about risk management.

Risk management continuum very bluntly stated:

1. Rules for cutting risk when you lose (P/L memory)

2. Rules for how big you can be constrained by aggressive portfolio shock assumptions (ie no P/L memory but positions that can lose X% AUM not allowed)

I’ll just say from option trading context #2 is preferable because the best opportunities likely occur when everyone else is constrained by #1

But that framework is not typical, harder to implement and will often make you feel like you are leaving $ on the table

But you don’t lose your business on an idio risk. There’s an irreducible amount of systematic risk already. Don’t make idio something that can take you out.