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Downside Risk Management
The prevailing view of “risk” used in the financial services industry defines “risk” as total volatility, which treats upside and downside “risk” as the equivalent. From the beginning, Cougar Global has recognized the inadequacy of this definition of risk because it causes investors to ignore bull and bear markets. Common sense tells us to protect in down markets and to participate in up markets. The research on downside risk management was conducted at the Pension Research Institute, founded by Dr. Frank Sortino in San Francisco, California, in 1980. Dr. Sortino long ago recognized that the degree of risk involved in any financial decision depends on what goal the investor is trying to accomplish. For most financial decisions, there is some rate of return that must be earned at a minimum in order to accomplish the goal. This is called the Minimal Acceptable Return (MAR). Returns below the MAR incur risk of not accomplishing your goal. Returns above the MAR are the reward you get for taking the risk, and every investment decision involves a trade off between risk and return. For further information on Cougar Global’s approach to downside risk management, please refer to the “Investment Management” section.