Who Cares About Risk Management?

Call it the aftermath of a covid period where fears for one’s own life had reached its paroxysm. As a result, nothing seems scary anymore. Certainly not market risk, where an insatiable thirst for life has gripped everyone.

The epitome of this surrounding craziness is best exemplified by Cathie Wood’s ARKK fund, down 26% from mid-Feb21 peak, but still 115% over the past year (!). It is super-charged with all the good stuff, biotech/Bitcoin/tech and even a surreal bet on Tesla. Far from me the idea to pick on a fund that is getting trashed in the market, but it’s tempting to shed some light on the utter disregard for risk management by investors.

Indeed, absolute yield is the mantra. Show me your 400% and I’ll show you my 600%. Cathie Wood is probably a great marketer and a visionary, timely delivering the product investors crave for. She is not the only one. Robinhood made a specialization of pumping up hot stocks and leveraged trades to a vast array of retail clients. Let me break down for you what these two stories illustrate: risk is building up at the financial product level and at a systemic level.

I’m not calling for a doomsday scenario, but merely putting perspective on what risk-return should be. A yield serves a purpose. A yield comes with risks. Both evolve in tandem to deliver an expected outcome. You’re totally free to call…