A pre-defined process works best

Morphic follows a rules-based policy for stocks that have lost the firm money. Empirical evidence suggests that a pre-defined process deals with these situations better than allowing complete discretion. Prior to initiating a position, the analyst is required to identify not only risks, but also the likely impact of that risk; its probability, and their confidence interval. This gives an expected loss under different scenarios and allows price levels to be pre-defined. These levels are crosschecked based on the volatility of the stock – otherwise, you run the risk of exiting the stock on “noise”. Sizing is what drops out of the process at the end of this. With loss tolerance already defined, the PM needs to decide if they want to fully incept at the start or whether to keep some “up their sleeve” to take advantage of a risk event to add.