The risk management approach used by DRC relies strongly on diversification across both markets and market sectors. This commitment to broad diversification means that approximately 60% of the markets included in our portfolios represent physical commodities, with the remaining 40% allocated to various global financial futures. While diversification is the primary means of risk management, care is taken not to over-diversify. Futures contracts are only included in the portfolio if they are relatively uncorrelated with other markets in the portfolio or if they contribute to maintaining a balance across market sectors.

The number of contracts of each futures market traded is determined by Dynamic Risk Balancing. This involves adjusting over time the number of contracts for each position such that the expected dollar equity risk for trading any particular market is maintained at roughly the same level as that of other open positions.

Due to the long-term nature of the trading system, the stop loss orders for individual markets will sometimes be far from the current market. This may expose portfolios to large equity swings, particularly during periods when the markets are more highly correlated than usual. While these equity swings are usually temporary, on occasion they can lead to relatively large drawdowns.

Fractal mathematics asserts that risk cannot be conveniently managed using standard statistical techniques. This view encourages us to "expect the unexpected", and to be prepared for possibilities which have not surfaced in either our research or past experience.