How will you manage risk if you are restricted from using cut-loss method?

[helpme_please]

Cutting losses is the most commonly cited method to manage risk for traders. However, I have heard of some traders who don't use cut-loss method to manage risk. For example, private equity can't cut their losses because they own the whole company. Surprisingly, even established trend-followers like Dunn Capital does not use cut-loss method to manage risk. I am puzzled how they manage risk.

Suppose you are restricted from using cut-loss method to manage risk. How would you manage risk in this situation?

 

[sef88]

Dunn capital uses VAR risk metrics to scale in and out of position. If you think of it, the expectation of whether a commodity or indices will go up or down is based a continuous distribution. Hence it will be more optimal to have dynamic position sizing that correspond to forecast or expectation of price moves.

 

[guru]

I’ve seen an options consulting firm that designs options strategies on top of stock holdings, basically utilizing shares as one of the legs. This way they can create any options strategy that the client may want to end up with.
Mark Cuban’s collar was also designed by Goldman to limit his risk and lock in profit after he sold his company to Yahoo. During his lockup period he also shorted couple indexes that held Yahoo, then executed his options-based collar trade after the lockup period.

 

[Nobert]

All of the bellow goes for swings*

Suppose you are restricted from using cut-loss method to manage risk. How would you manage risk in this situation?

Then, you would only bottom fish in equities.
If time horizon is irrelevant, success ratio will be ~90% (minus CEO running away to Thai jungle etc.),

Remaining three categories of those who do the same but still loose :
#1. The impatient ones
#2. The ones with short time horizon
#3. Those who have no clue of what they're doing

Suppose you are restricted

It's not a restriction, it's a luxury.

 

[Tradex]

Surprisingly, even established trend-followers like Dunn Capital does not use cut-loss method to manage risk.

For pure trend followers, a new signal in the opposite direction is the stop (and also an entry of course).

These are called always-on trades.

 

[ajacobson]

Depends on the size of the portfolio. Everything from an outside manager who overlay crisis hedges. Simple derivative hedges, inverse ETFs, dynamic asset allocation(you reduce exposure as the portfolio goes up and the inverse when it goes down). Think of it as holding a constant delta or a constant portfolio allocation to risk.
A ton depends on the size of the portfolio, correlations to a tradeable index, and concentrations of the components. The Mark Cuban mention above is a great example - collars may not have any out-of-pocket cost and a good idea if you have a big concentration in a few names, but they takeaway upside. Often a portfolio will deploy multiple styles - 1/3 collars - 1/3 put spreads -1/3 volatility hedges, but most portfolios are not as clean as textbook risk management. Sometimes you can't get a perfect risk management match and you may have to consider a strategy that only provides a partial hedge.
Sometimes by mandate, you can't hedge at all.

 

[KCalhoun]

One way I control risk is by starting multiple positions with minimal size, then scale into winners while holding tiny size in losers. I also hedge by trading inverses.

Main lesson learned is most trades fail at some point, so tiny size starts are essential. Eg most new swing trades I start with less than $500 worth of shares, dozens of these starter trades.

 

[Tradex]

One way I control risk is by starting multiple positions with minimal size, then scale into winners while holding tiny size in losers

Simple yet brilliant idea.

Unfortunately I have a hard time following it, as I tend to go "all in" right from the start (LOL)!

Oh well.