Campbell R. Harvey Bücher

Risk management has gained prominence, especially following the global pandemic that disrupted equity markets. Despite its critical importance, it often remains an overlooked aspect of investment strategy, with portfolios created and then passed to risk management teams without further consideration. This book offers a new perspective by advocating for the integration of investment and risk processes, a method that has proven successful for Man Group, one of the largest publicly listed hedge fund companies. The market downturns, particularly during the early months of 2020, highlight the need for effective risk management, yet it is typically only after such crises that investment strategies are reassessed. A common practice involves separating the investment management team from the risk management team, which can lead to reactive risk reduction measures. Instead, we propose that risk management be embedded within the portfolio design itself, a concept we call strategic risk management. This framework includes essential elements such as defensive strategies, drawdown risk controls, volatility targeting, and the timing of rebalancing trades. Drawing from our research, we evaluate how our strategies performed during the recent market drawdown, providing insights into effective risk management practices.

During the 2008 Global Financial Crisis, our financial infrastructure collapsed, prompting governments to bail out failing institutions. This crisis led to a critical reassessment of our financial system. Questions arose: Why does it take two days to settle stock transactions? Why do retailers incur a 3% fee for credit card swipes? Why are savings rates so low? Why is financing difficult for entrepreneurs through traditional banks? In this context, the authors introduce Decentralized Finance (DeFi) as a transformative approach to finance. They argue that the current financial landscape is primed for disruption, highlighting how DeFi addresses many existing issues. By facilitating peer-to-peer interactions without physical institutions, DeFi reinvents savings, lending, and trading through innovative algorithms. The book explores groundbreaking protocols like Uniswap and Compound, showcasing companies that may soon gain prominence. While acknowledging the risks associated with new technologies, the authors provide a thorough analysis of these challenges and potential mitigations. This work is ideal for finance professionals and policymakers, offering a vision of a future where the financial landscape will be fundamentally altered. Readers are encouraged to engage with this disruption rather than be left behind.