Risk budgeting like a fund
A professional fund decides how much risk it may take before it decides what to hold, then spends that budget with care. The same habit works on a private portfolio.
Risk as a budget
A risk budget is a limit set in advance: how far the fund may fall, how much it may swing, how much one holding may weigh. Every new position spends some of it. When the budget is used up, nothing new goes in until something comes out.
The rule every UCITS fund lives by
European law caps how much a UCITS fund may hold in one company: normally 5%, up to 10% at most, and the holdings above 5% may not add up to more than 40% together. A fund with five holdings at 9% each would break the rule, because 45% sits in its big positions.
How far from the plan
Big funds also budget how far they may stray from their benchmark. Norway’s fund may differ from its index by no more than 1.25 percentage points of expected tracking error a year. It is a fence around the manager’s own ideas.
Things that fall together
Ten holdings that all rise and fall together are closer to one bet than to ten. Funds watch correlation, how closely holdings move together, because spreading only works between things that do not move as one.
Rules for the bad days
Many funds write down in advance what they will do after a set fall, such as cutting risk once the fund is 15% below its peak. A rule decided on a calm day is easier to follow than a choice made in a panic.
Key takeaways
- Set the limits first; then choose what to hold inside them.
- A UCITS fund holds at most 10% in one company, and its big positions at most 40% together.
- Holdings that move together are one bet, not many.