Portfolio Management & Risk Mitigation

Alright everybody, today we’re talking about risk management.

For those of you who don’t know, I’m a huge Seinfeld guy, and there’s a fantastic episode all about this.

You should all check out this hilarious clip here.

Now, I imagine it’s fairly obvious why this would be relevant to you as a fund manager, but let’s look at it from a birds eye view.

First, I need you all to think as if you were a financial advisor.

You’ve got a “basket” of stocks, bonds, alternative assets, etc. that make up your portfolio.

As a private fund manager YOU are a portfolio manager and you have a responsibility to mitigate as much risk as possible.

For yourself, and for your investors.

There are several different approaches and strategies that you need to understand in order to reduce risk.

Let’s look at a couple of them here.


A hedge, in its simplest form, is basically investing in two different assets to offset the effect of a dip/crash of any given asset.

For example, while one stock may go plummeting down, perhaps another takes off. If you have a position in both of those, then you’re going to mitigate any negative effects the downward turn may have on your portfolio.

Investopedia mentions the following on hedging,

“Risk is an essential, yet precarious element of investing. Regardless of what kind of investor one aims to be, having a basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves.”


The catch here, or downside, is that if you over hedge then you’ll make no money at all.

So it’s important to find a happy medium and invest at an appropriate adjusted risk rate of return.


It’s going to be essential for you to firmly understand and define the agenda of your fund.

Are you going to be aggressive? Will you be conservative?

Are you going to be income based? Or will you be tax efficient?

What is the target and end game of your fund?

Whatever it is that you decide YOU must be an expert and always be looking for ways to mitigate risk within your given expertise.

Be it real estate, stocks, venture capital, forex, etc.

Commercial Real Estate Example

To illustrate what I’m saying, take this example for a fund dealing with CRE.

Let’s say that 80% of your assets are buildings in major cities along the east coast.

A couple things that you’d need to factor in are georgraphic risk of having them all relatively close.

Are these buildings all used for the same purpose?

To help offset that position perhaps you dedicate the remaining 20% to properties located on the West Coast.

Or maybe you invest in some buildings in the Midwest.

Sure that won’t be where you making the majority of your money, but it’s a good safety net to have in case anything were to go south.

The same goes for nearly any portfolio; invest in something that will balance out your assets.

To get the best feel for this I highly recommend a book called “Pioneering Portfolio Management” by David Swensen.

Swensen managed the Yale endowment and had a phenomenal track record.

When people asked him how he did it he said…

“Instead of focusing on winning, I focused on not losing”.

David Swensen

The idea being that as long as he doesn’t lose, then he never has to play catch up, which is often the most difficult aspect of the investing game.

Concentration Risk

This is a technique that fund managers will outline just how far they are willing to go with one investment.

In short, you would hypothetically say to your LPs, “in order to protect you as the investor and the fund itself we will not invest more than X% in X”

The parameters of this agreement are typically outlined in your legal documents, which ensures that you will not cross those predetermined boundaries.

Even though you may find a deal that tempts you to just those hurdles you’ve put in place, those restrictions are going to keep everyone involved safe in the long run.


I hope that my point got across as clearly as I hoped it to when I wrote this.

Sometimes the best offense is a good defense.

It’s so important to keep a level head and ensure that all the possible measures have been taken to mitigate risk.

Doing so will pay dividends down the line like you cannot imagine.

It’s also so important to place boundaries for yourself beforehand so that in the moment you know what direction to take for the long term wellbeing of the fund.

All the best,

Bridger Pennington

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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.

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