As investment managers we are in an inherently risky business.
We need to understand the risks we’re taking and, where possible, try to hedge against risks we’re concerned about.
Going down this rabbit hole can take you into the realms of Donald Rumsfeld's infamous 'known knowns', 'known unknowns' and 'unknown unknowns'.
The various risks that can affect a multi-asset portfolio are endless: inflation risk on government bonds, default risk on corporate bonds, recession risk for equities, discount risk for investment trusts.
And that's before we get to issues such as geopolitics, liquidity, fraud, regulation, cybersecurity and technological disruption. The list goes on - it’s a wonder we sleep.
Sometimes a risk can be not taking enough risk. I'm sure many fund managers have found themselves in that position this year.
The start of the year saw panicked markets, recession fears and a spike in people googling 'yield curve inversion'.
It was very easy to get your tin hat out, but in doing so you would have missed out on significant returns so far this year, with US markets revisiting all-time highs, and 'market melt-up' joining the fray of most googled search terms.
Howard Marks (of Oaktree Capital fame rather than Mr Nice) always writes very concisely on the matter of risk.
He often reminds us the issue with risk-taking is that much of risk is hidden, subjective and unquantifiable - and often never realised. It is the latter point I often think is missed by many.
If you walk across the road, you take on a known known.
If you abide by the Green Cross Code (“Stop, Look and Listen” for those that weren’t 70s/80s kids) you should navigate the crossing safely. If you cross the road with your eyes closed, that is more of a known unknown.
But if you run across the road without looking, after a day at the cricket and more than a couple of beers, like my friend Sam, that is more akin to an unknown unknown. To him anyway - admittedly not to others.
Thankfully his run in was only with a Sri Lankan tuk tuk, resulting in a few nasty bruises and a hangover of shame.
In investment, there are some people who run across the road all the time without looking, and some more knowingly than others.
The majority of the time they probably get to the other side safely, but it doesn’t mean it was a smart thing to do. And the time they don’t ... well, they might not be as lucky as Sam.
Over the last few years, investors with overseas assets have had a tail wind from weaker sterling as a result of our current Brexit woes.
Currently sterling looks very undervalued. If it strengthens, those UK investors could find their overseas assets worth significantly less. This may not happen – certainly in the short term with Brexit lingering on – hence it is a known unknown.
In our fund we have plenty of overseas assets, and as a result are hedging our euros and a large percentage of our dollars in order to protect the value of those assets should sterling strengthen.
If the pound were to weaken, we’ll still benefit from some of our overseas assets that are not hedged, though we’d miss out on some of those gains.
That is a risk we can live with. However, I fear for some investors it is not a risk they have really thought about, or protected against, and so it is an unknown unknown to them.
They may still make it across the road safely. But we are looking both ways, and it is looking pretty busy.