Strategic Asset Management
 

At Meridian Strategic Asset Management our mantra is “Return on Investment is Meaningless Without Quantifying Risk”.  Our products were built upon this premise.  In today’s world of quick fixes and get rich quick schemes it seems as though everyone is interested in the bottom line (return on investment) but that few are willing to examine the risks associated with the potential benefits.  “Day trading” is analogous to driving your car 150 miles in one hour.  Sure, you doubled your rate of return (as opposed to 75 mph), but you risked your life to do it.  Is the return commensurate with the risk?  Better then 95% of all day-traders loose money in the long run while trying to get rich quickly.

Risk can be viewed as volatility in an asset’s value over time.  Accordingly, our portfolio analysis tool was developed to provide many different measurements of risk and volatility.  Several of these measures include:

• Worst Initial Loss: a measure of far below the initial funding amount your account would dip if you had started trading that portfolio on the worst possible day to start in the given history.  (This is not to be confused with Maximum Drawdown – for a discussion on the differences between Maximum Drawdown and Worst Initial Loss please see Appendix G.)

• Average Initial Loss: roughly how much you should expect your account to dip as trade are initiated in your account for the first time.

• Windows of Profitability: measures of how often you could expect to be profitable within a given time period.

We know of no other CTA, Mutual Fund, Hedge Fund, Bond Fund, etc. that provides it clients such extensive measures of risk.  Only by clearly and deliberately defining risk can one determine the reward to risk ratios. 

So, how was this information leveraged to produce the Meridian Risk Management Portfolios?  Well, by constantly measuring these and other measurements of risk in conjunction with return on investment we were able to engineer portfolios which have a better likelihood of minimizing risk (volatility) relative to return on investment (see Appendix E for our results).  This was accomplished by manipulating several factors.  First, each portfolio is diversified across five to six industry sectors.  Second, each market was individually analyzed to see how it interacts with other markets so that the portfolios could be built using markets that interact synergistically.  Third, positions are not heavily leveraged.  The Meridian Risk Management Portfolios maintain roughly a 20% margin to equity ratio.  Fourth, the Meridian Trade Selection Method maintains an appropriate mix between long and short positions (holding a short position means that if the asset’s value declines the position’s value increases).   

Please realize that in 99% of other investment opportunities, be it mutual funds, real estate investment trusts, bund funds, or straight indexed baskets, that 100% of the positions held by these investments will be long (bought) positions.  Thus, when catastrophic events occur, such as in 1929, 1987, and 2000, these investments, even though diversified across many companies and sectors, decline in value because all of their positions are long.  These investments are notorious for having zero diversification between long and short positions (a "short" position is a position which is sold first, in anticipation of a decrease in value, and bought back later, hopefully at a lower price than it had been sold at.  Long positions are the inverse - bought first and sold later, hopefully at a higher price).  This lack of diversification is a major risk!  Alternatively, positions held within the Meridian Risk Management Portfolios are nearly 40% short.  Thus, in the event of cross market and cross sector devaluation the short positions will help offset the losses resulting from long positions.