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wards can be small with arbitrage. Singer feels limiting leverage is the most important risk management tool at the moment. Singer says he uses a low level of leverage, 1.3:1 to 1.5:1, in all businesses, except with fixed income arbitrage. With fixed income, Singer's leverage is 20:1, which he says is in line with his peers. His strategy has not changed over the years.

While not specifying a level, Kovner says he uses leverage cautiously.

Henry adjusts leverage; leverage can be anywhere between three and six times capital. Leverage is managed to be lower during choppy, negative periods and geared up during strong periods. Leverage in managed futures is different from that in stocks. It is the margin put up versus the value of the contract size, therefore reflecting the dollar amount the manager controls.

Other Factors

Other risk management techniques include stress testing, taking smaller positions, or reducing allocations quickly if a situation becomes unattractive.

Kovner says he takes smaller positions than do other managers, and does considerable stress testing on the portfolio daily.

Och reduces allocations quickly if a situation becomes unattractive. Liquidity of positions is always taken into account.

For Kingdon, rule number one is to cut losses. Rule number two is not to forget rule number one. Other rules are not to try to turn a loser into an investment. If you buy a stock and it is no longer valid, sell it. A technical breakdown of 15 percent from cost is sufficient reason to reverse the trade.

To lessen the impact of herding, Singer finds out who else owns the spreads and determines their motivations. If there are too many players, the position can be a trap. Singer also tries to do as much as possible that is uncorrelated to the stock market.

At Paloma, the risk manager is independent of the manager.

INSTITUTIONAL PARTICIPATION

Institutions make up a large percentage of these managers' investor bases. With a long-term time horizon, the institutions' assets make these managers' asset bases more stable.