Risk Management
Capital preservation is not a constraint on returns. It is the foundation of returns. Every recommendation we make is built around a rigorous framework for managing downside risk.
Don't Lose Money. Then Don't Forget Rule One.
The asymmetry of losses is the most important mathematical fact in investing. A 50% loss requires a 100% gain to recover. A 20% loss requires 25%. Avoiding large drawdowns is not timid — it is arithmetically essential to long-term compounding.
Risk management at Market Capital is not a separate department or an afterthought — it is embedded in the investment process from the moment a new idea is identified to the moment a position is closed. Every analyst is required to articulate the bear case before the bull case, and every recommendation includes an explicit maximum acceptable loss before the position would be exited.
We have witnessed what happens to portfolios that prioritise return over risk — the spectacular gains followed by devastating drawdowns that erase years of progress. Our approach is deliberately designed to avoid this pattern, even if it means accepting lower short-term returns in exchange for more consistent, sustainable long-term performance.
Five Layers of Risk Control
Our risk framework operates at five distinct levels — from individual position management through to portfolio-level stress testing. Each layer is designed to catch different types of risk.
Position-Level Stop-Loss
Every recommendation includes a predefined stop-loss level — a price at which the position would be closed regardless of fundamental conviction. This is typically set at a level where the original investment thesis would be disproved (rather than a fixed percentage), preventing both premature exits on normal volatility and catastrophic losses from thesis failure. Stop-loss levels are reviewed and updated at each quarterly position review.
Conviction-Based Position Sizing
Position size is determined by conviction level, not equal weighting. Our highest-conviction positions — where fundamental, macro, and flow evidence all align — receive larger allocations. Early-stage or more speculative ideas receive smaller initial allocations that are built up as the thesis proves out. This approach concentrates risk in our best ideas while limiting damage from inevitable mistakes on lower-conviction positions.
Concentration Limits
No single position is allowed to exceed a defined maximum percentage of the overall portfolio. No single sector is allowed to exceed its maximum sector concentration. These limits are adjusted for correlation — two positions in highly correlated sectors or with exposure to the same underlying risk factor are treated as more concentrated than their individual weights would suggest.
Portfolio-Level Drawdown Monitoring
Portfolio-level drawdown is monitored daily. When the portfolio approaches a pre-agreed maximum drawdown threshold — defined per client based on their risk profile — we take defensive action: reducing exposure, increasing hedges, or raising cash. This prevents the dangerous tendency to hold a deteriorating portfolio in the hope of mean reversion, which is responsible for the majority of catastrophic investment losses.
Stress Testing & Scenario Analysis
We regularly stress-test client portfolios against historical market dislocations: the 2008 financial crisis, the 2020 COVID crash, the 2022 rate-shock drawdown, and custom scenarios based on current market conditions. This ensures clients understand the potential downside of their portfolio before it materialises — and that the portfolio is positioned to survive a severe scenario without permanent capital impairment.
How We Measure Risk
Maximum Drawdown
The maximum peak-to-trough decline over any period. We track this at both position and portfolio level, with predefined thresholds that trigger risk-reduction action when approached. Drawdown limits are set at client onboarding and reviewed annually.
Value at Risk (VaR)
The estimated maximum loss over a defined period at a given confidence level. We use VaR as one input into position sizing, combined with stress-testing against historical scenarios to capture tail risks that standard VaR models can underestimate.
Correlation Analysis
We continuously monitor correlations between portfolio positions — paying particular attention to positions that may appear uncorrelated under normal market conditions but that converge during market stress, when diversification benefits disappear at precisely the moment they are most needed.
Liquidity Risk
All positions are assessed for liquidity risk — the ability to exit the position at a reasonable price under adverse market conditions. We do not recommend positions in securities where the exit could significantly move the market against us, particularly for larger account sizes.
Invest with a Firm That Puts Risk First
Our risk management framework is built to protect your capital through every market cycle. Open an account and receive personalised risk guidance from our team.
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