Asking for higher drawdown / VAR asks

Based on the most helpful WSO content, here’s what you need to know:

1. Increased Drawdown/VAR Expectations:

   • Asking for higher drawdown or VAR limits does come with implicit expectations. If you request more risk capital, the assumption is that you’ll generate proportionally higher returns. This can create pressure to deliver, especially if your performance doesn’t meet the new expectations.
   • Many firms have strict risk management policies, and exceeding drawdown limits can lead to termination. Be cautious about overpromising and underdelivering, as it could jeopardize your seat.

2. Pitfalls of Underperformance:

   • If you underdeliver after being granted higher limits, it could damage your credibility and future opportunities. Firms often view risk-taking as a privilege, and failing to justify the additional risk could lead to tighter restrictions or even a loss of trust.
   • Additionally, market conditions can change, and strategies that worked well this year may not perform as effectively next year. This is especially true in volatile sectors like energy.

3. Timing and Approach:

   • It’s generally better to let your performance speak for itself and wait for the firm to offer increased limits. However, if you feel strongly about your ability to handle more risk, you can make a case for it. Be prepared to back up your request with data, such as your VAR/DD-to-PNL ratio and how you’ve managed risk effectively.
   • Frame your request as a discussion about aligning your risk limits with your strategy’s potential, rather than simply asking for more risk capital.

4. Maintaining Status Quo:

   • If you believe next year’s strategy is better suited to maintaining the status quo, there’s no harm in sticking to your current limits. Consistency and steady performance can be just as valuable as taking on more risk, especially if market conditions are uncertain.
   • Remember, many top-performing PMs and traders prioritize survival and longevity over aggressive risk-taking. Tight drawdown and volatility limits are often the bottleneck to survival, as highlighted in WSO discussions.

5. Key Considerations:

   • Before making a decision, assess whether the potential upside of increased limits outweighs the risks. Consider factors like market conditions, your strategy’s scalability, and your ability to manage larger drawdowns.
   • Be honest with yourself about your risk tolerance and whether you’re prepared to handle the pressure of higher expectations.

Ultimately, the decision depends on your confidence in your strategy and your ability to manage risk effectively. If you decide to proceed, ensure you have a clear plan and communicate it effectively to your firm.

Sources: Diminutive Nature of Net Returns, What would you do with $300k, Rare PTJ Interview from 2000., Leaving a single manager to start a book at a platform, https://www.wallstreetoasis.com/forum/trading/qa-vp-trader-at-bb?customgpt=1