Risk Management
Our risk management framework has the objective of preserving capital for our clients
Risk Management Framework
BlockArb prioritizes capital preservation as the cornerstone of its risk management approach, achieved through conservative yet systematic engagement in activities with a strong probability of delivering consistent, albeit moderate, returns
Market Risk
Market risk refers to the potential for financial losses due to unfavorable fluctuations in market prices. Typically, this risk is gauged by assessing the volatility of the assets within a portfolio
We mitigate market risk through a price-agnostic strategy that remains unaffected by adverse price movements. In fact, during periods of heightened volatility, our strategy excels, as it capitalizes on the increased occurrence of market discrepancies in such times.
Credit Risk
Credit risk, also knows as counterparty risk, is the possibility of losses arising from a borrower or a counterparty default by failing to make required payments. In our situation, we have credit risk exposures with counterparties keeping our investment capital in custody, including our prime brokers and custodians.
In order to monitor our credit risk, our team periodically reviews our current counterparties to make sure that our credit risk exposure is within predefined limits. In addition, we aim at establishing relationships with multiple counterparties in order to mitigate our financial exposure to one particular entity.
Operational Risk
Operational risk is the risk caused by inadequate internal processes and technological systems within our organization or from external events like regulatory, compliance, and legal risks. In particular, since we rely heavily on trading algorithms to execute our systematic investment strategies, operational risk could arise from glitches in our investment algorithms and errors in the development of our technology.
In order to minimize our operational risk, our team adopts a rigorous testing process of our technology and invests in new investment products by using proprietary capital for an initial period before the new investment product is offered to our clients. Since most of our investment technology is proprietary and developed in-house, we have full control and speed in case modifications need to done to our trading algorithms. In addition, our team periodically reviews our backup procedures and disaster recovery systems to minimize downtime in our investment technology and operations.
Liquidity Risk
Liquidity risk is the possibility that for a certain time period a given financial asset cannot be traded quickly enough without having a substantial market impact due to a lack of buyers or sellers. This situation arises in particular with alternative investment managers, like private equity, and venture capital companies making investment in private equity or debt securities, or with hedge funds trading illiquid and more exotic securities.
We try to minimize our liquidity risk by investing the majority of our capital in public investment products traded on regulated exchanges, meeting certain criteria regarding liquidity and trading volume.
Margin Risk
Margin risk encompasses the potential for losses stemming from broker-imposed margin calls and subsequent liquidation of positions due to insufficient capital to support open investment positions. Our specific exposure to margin risk arises from the nature of our investment strategies, which involve trading derivative instruments with embedded leverage facilitated by margin financing.
To effectively mitigate margin and leverage risks, we prudently restrict our trade exposure to a maximum operational threshold of 0.5% of our total capital. This precautionary measure ensures that margin levels never reach a point where investor capital is jeopardized.
Execution Risk
Execution risk is the risk due to the possibility of receiving a different transaction price from the moment when an investment decision is made until its effective execution. It results from many reasons, such as human delays in executing an invesment decision in the case of discretionary investment managers, or from the need to reduce market impact due to a lack of sufficient liquidity in the financial instrument traded in case of large institutional investors.
We try to mitigate execution risk by utilizing automated execution algorithms that try to capture investment opportunities as soon as they arise.
Asset Class Risk
Asset class risk is the possibility of losses by having a portfolio concentrated in a particular asset class. This risk arises typically in some hedge fund strategies, like equity long-short, credit, convertible bonds, merger arbitrage, activist investors, or commodity traders who invest in only a particular asset classes. Since a major components in the returns of a particular security are due to systemic factors affecting a particular asset class, measured by its beta, the previous investment entities are usually excessively exposed to risks affecting a particular asset class in a specific time period, unless they hedge their market risk exposure with proper derivative instruments.
As a digital asset company, our goal is to mitigate asset class risk by employing a combination of hedging with synthetic assets and a rigorous portfolio management system. This system ensures that 95.5% of the investment fund remains out of the market at any given time of the trade, safeguarding the funds from sudden risk to the asset class.
Sector Risk
Sector risk is the risk arising from investment in a particular market sector, such as technology or biotech. This type of risk is prevalent in equity and credit hedge funds targeting a particular industry, or in venture capital and private equity companies which are highly exposed to the technology sector.
In order to minimize sector risk, we have the objective of deploying capital globally on multiple asset classes and different equity sectors through a diversified portfolio.
Geographic Region Risk
Geographic region risk is the possibility of losses due to the concentration of investments in a particular geographic area. This type of risk is prevalend in hedge funds and alternative investment managers focusing on a particular geographic region, like North America, Europe, Developed World, or Emerging Markets.
In order to mitigate geographic region risk, we invest globally on multiple public exchanges and investment products across the world.