Who Cares About Risk Management?

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Abstract

isk 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 the hot shots on risky stuff, for the thrill mainly. What you’re not in control of is the risk of the

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platform you invest on. The financial infrastructure of the US markets has decayed through time, and doesn’t allow participants to keep track of risks accurately. The fact that it allowed the market to borrow 40% more GameStop stocks than available, and short them, was clearly an overdue warning sign.Blockchain and DeFi (Decentralized Finance) offer a fresh stab at this. Aside from the fact that crypto is a fully-fledged alternative investment and has quickly evolved from a “commodity” to a yielding asset, it offers the once-in-a-lifetime opportunity to rebuild the financial rails with software. The first focus has been on shaping up trading, lending/borrowing, and derivatives, and now comes the great thrill of designing what risk-return is for DeFi assets. Thrilling !Benjamin — Venture Studio partner</article></body>

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 the hot shots on risky stuff, for the thrill mainly. What you’re not in control of is the risk of the platform you invest on. The financial infrastructure of the US markets has decayed through time, and doesn’t allow participants to keep track of risks accurately. The fact that it allowed the market to borrow 40% more GameStop stocks than available, and short them, was clearly an overdue warning sign.

Blockchain and DeFi (Decentralized Finance) offer a fresh stab at this. Aside from the fact that crypto is a fully-fledged alternative investment and has quickly evolved from a “commodity” to a yielding asset, it offers the once-in-a-lifetime opportunity to rebuild the financial rails with software. The first focus has been on shaping up trading, lending/borrowing, and derivatives, and now comes the great thrill of designing what risk-return is for DeFi assets. Thrilling !

Benjamin — Venture Studio partner