Downside Risk Management in Emerging Markets

The recent financial crisis and the corresponding market crash have had a tremendous impact on investors with significant exposures to equity markets but without appropriate risk control tools. Indeed, within just a few weeks a number of pension funds, university endowments, and mutual funds suffered catastrophic capital losses, in some cases registering a drop in net asset value in excess of 50 percent. This has renewed investment professionals' interest in techniques for downside risk mitigation, which requires both accurate risk measurement tools and effective risk management strategies.In this article we develop and evaluate a number of such tools and strategies in the specific context of an emerging markets equity long-only product. While the tools developed in this article can be applied to other asset classes, we chose to focus on emerging markets due to their growing importance among global equity markets