Risks of Managed Funds?

I guess we're all about maximising our Return on Investment while minimising our 'risk' so I thought I'd kick off this topic so that we could collectively list some of the perceived risks and identify some of the ways we may minimise these risks.

Yes.......there is also risks involved in doing nothing and there are a number of obvious positives but let's concentrate on the risks ones once this step has actually been taken for now.

Risk 1.
Margin Calls-if the Market drops enough we may be exposed to these calls.

Risk 2.
Loss of Capital-if the Market drops below our purchase price we may be unable to redeem our original Capital without taking a loss.

Risk 3.
Interest Rates rise(Costs) rise above our expected return.

Risk 4.
The Fund Manager goes broke.
This may or may not cause an actual loss depending on the individual situation.

etc etc.

Ok.....let's throw it open........identify some more and start to discuss some of the risk mitigation strategies.......

Alan

Ad1.
I read somewhere long time ago that you can borrow using a capital protected lending option to invest into a share portfolio. In this loan you pay a relatively higher interest rate on the money you borrow and an amount for protecting your capital.This is like an insurance policy over your loan.
Where a protected loan is used, you keep the ownership of shares and your existing portfolio is protected against a fall in value.

Ad2.
It is not possible trade / invest in Stock Market without considering losses.
Unfortunately, the only thing you can control trading Stock Market ( if you trade hands on ) is amount of money you are willing to lose.

Ad3.
I guess that this depends on how much interest rate will rise.

Ad4.
I am not sure if Fund Manager can go broke unless he manages his own money.
In case of doom scenario, someone else will take over.

Thanks Troppo.

Some other thoughts.......

1. I guess we can reduce the risk of a Margin Call by giving ourselves a healthy buffer with our Gearing Ratio. For example, if up to 70% is allowable on the portfolio, then maybe keep it at 50% or below?

2. This is a harder one. If we follow the argument that you will only crystalise a loss if you sell, ideally, don't sell ! This is going to depend very much on individual circumstances, but if cashflow allows, maybe you simply hold until the market rises again. May not be possible if you really need the money though so part of the risk minimisation may be ensure you have enough cashflow that you aren't forced to sell?

3. I suppose the simple option here is to Sell!

4. Not sure about this one and may depend on the specifics of the Fund? Even if the Shares got transferred to another Manager, I wonder what the timeframe would be? If it was a matter of weeks it may not be a real risk but what if the process involved legal actions etc? If the process got tied up for months or years it could be a big risk as presumably your shares could also be frozen. Does anyone know of any examples where this has actually occurred?

Alan,

Ad1.
Healthy buffer might help. Gearing under 50% also. Reasonable stop loss or hedging might be the best protection against Margin Call.
In my view any Fund Manager who is able to get Margin Call should be prosecuted.

Ad2.
" If we follow the argument that you will only crystallize a loss if you sell, ideally, don't sell !".

This is a receipt for disaster !!.
Long time ago in 1976 or 1974 ( I am not sure about correct date ) a lot of people invested in BHP shares.....
Price moved down and investors waited approx.10 years to get their money back...
You might say that ..... they did not lose .....Think about it...
If money is not working for you and even worse if your money is frozen for 10 years you are unable to invest elsewhere...
So .... practically you are losing money.
Having enough cash flow has nothing to do with a " logic " such as you will only crystallize a loss if you sell.
Preserve your capital = First rule of trading / investing !!.

Ad3.
It depends on the individual circumstances.

Ad4.
I can not specify time frame. Few days the most - I guess.

Hi Tropo.

I probably did try to oversimplify that too much and didn't necessarily explain myself too well. I still believe it BUT with a whole lot of qualifiers and conditions that certainly doesn't just mean hold onto anything that has fallen in price. Probably a good separate topic at some stage............

Out of curiosity, assuming you are referring to stop losses etc, what percentage fall do you typically accept before you sell?

Alan,
When I was trading Stock Market I used 2% rules.
2% stop rules = The total loss for any single trade should not be greater than 2% of total capital.
Most successful pro, allow themselves to risk no more than 1.5 %.

So if you trade a $ 20K account, you may risk no more than $ 400 on any trade.
With $ 100K account and using 2 % stop risk no more than $ 2000 on a trade.
Note...
With an account of $ 20K and using 2% stop on each trade it would take approx. 193 consecutive losses to wipe out whole account of $ 20 K.