SD-01.9 — Risk-Capital & Strategy Allocation

Business Domain: BD-01 Investment Strategy & Allocation (Front office) · Applies: BOTH

Purpose

Allocates risk capital across strategies, pods and portfolio managers — the multi-strategy hedge-fund and multi-manager-platform paradigm. The unit of allocation here is not an asset-class weight but a risk budget — a volatility contribution, a value-at-risk allowance or a stop-loss limit — handed to a team. Allocation is continuous and performance-reactive, not periodic and governance-gated: capital flows toward the highest risk-adjusted performers and away from the rest, and drawdown thresholds trigger automatic cuts. SD-01.9 is the firm-level allocation capability for a platform whose return is the sum of many independently-run books; it is activated by hedge funds and multi-manager platforms and dormant elsewhere.

Service Operations

Source and vet portfolio managers and strategies — review candidate trading teams and strategies and decide which to fund.
Onboard and set terms for a strategy or pod — set the initial capital sleeve, the risk budget, and the leverage and drawdown limits at funding.
Allocate and size the risk budget — assign each strategy, pod or manager its risk budget — the binding constraint — and the capital sleeve that carries it.
Reallocate capital on performance — move capital toward higher risk-adjusted performers and away from the rest, continuously.
Enforce drawdown-triggered de-allocation — apply the automatic, non-discretionary capital cuts and terminations that drawdown thresholds trigger.
Allocate and monitor leverage — set and police gross leverage per strategy and firm-wide.
Manage cross-strategy correlation and factor crowding — monitor and budget the convergence risk of nominally independent strategies.
Aggregate firm-level risk — net exposures across all strategies and manage the platform’s aggregate tail exposures.

Inputs and outputs

Inputs: strategy and portfolio-manager track records; performance and drawdown data; risk measurements (Risk Measurement, E-19); the governing mandate (SD-01.2).
Outputs: the risk-budget and capital-sleeve allocations, the leverage limits, and the firm-level risk picture — consumed by the pods as internally-issued mandates, by BD-05 and BD-06, and by BD-07 Investment Risk.

Entities

Consumes: Risk Measurement (E-19, any risk_type), Risk Limit (E-16), Portfolio / Mandate (E-03) for the pod portfolios; the SD-01.2 governing mandate.
Owns: E-28 Risk Budget — a risk allowance allocated to a strategy, pod or portfolio manager (the allocated amount, its measure, and the allocation / reallocation lifecycle). Distinct from the configured Risk Limit (E-16): a budget is a deliberate share of a finite risk pool handed to a team, not a ceiling a measured risk must stay within. The allocation lifecycle — budgets summing to a total and reallocated toward performers — is the content E-16 cannot carry.

Standards

No external standard governs risk-capital allocation; it is a practitioner discipline. Risk budgeting and component-value-at-risk decomposition are the shared analytical tools with BD-07 Investment Risk.

Open extensions

The reallocation model on E-28 — the rules and triggers by which a budget is cut, increased or reallocated across the pool.
The boundary with SD-01.6 on factor risk budgeting versus team-level risk-capital allocation, and with BD-07 on risk measurement.