Curriculum·R403 Risk Management as the Actual Product·about 33 min
Portfolio-level risk
By the end of this lesson you can
- →Explain why portfolio risk is not the sum of position risks, and what the difference is called
- →Compute the gap between independent and perfectly correlated risk across several positions
- →Identify the positions in your book that are one trade wearing several names
- →Include counterparty exposure in the portfolio, because it correlates with everything else
Senior · enrolled learners
This lesson opens with Three Arrows Capital, June 2022.
- What happened
- Three Arrows Capital held large, highly correlated long exposure across crypto assets, funded by borrowing from a wide set of lenders. When prices fell through the first half of 2022 the positions moved together and the fund could not meet its obligations. On 27 June 2022 Voyager Digital issued a notice of default on a loan of more than $665M in bitcoin and USD Coin, and a court in the British Virgin Islands ordered the fund into liquidation, with creditors' claims later put at roughly $3.5B. Genesis filed a claim of $1.2B and, after liquidating about $1.14B of collateral, was left owed more than $2.34B. The default contributed directly to Voyager Digital's own bankruptcy, which reached depositors who had never heard of the fund.
- The decision point
- The individual positions were sized against individual theses and every one of them was the same trade. Correlation is not a refinement to portfolio risk, it is portfolio risk, and in this market it goes to one in exactly the conditions where the sizing was supposed to protect you. The second half is that a lender is a position too. Voyager's depositors held no view on anything the fund owned and were exposed to all of it.
- Recorded loss
- $3,500,000,000
What you will be able to answer
- →Why is portfolio risk not the sum of position risks?
- →How big is the gap?
- →What is the planning assumption?
- →Why is a counterparty a position?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://www.cnbc.com/2022/06/29/crypto-hedge-fund-three-arrows-capital-plunges-into-liquidation.html
- https://en.wikipedia.org/wiki/Three_Arrows_Capital
- https://www.forbes.com/sites/siladityaray/2022/06/29/court-reportedly-orders-liquidation-of-crypto-hedge-fund-three-arrows-capital-threatening-more-market-turmoil/
- https://www.federalreservehistory.org/essays/ltcm-near-failure
Confidence medium·Volatility low·Reviewed 2026-08-07·Owner unassigned
Contested
Creditor claims against Three Arrows Capital are reported at roughly $3.3B and roughly $3.5B depending on the date and the administrator's figures, and the Genesis position is reported as a $1.2B claim rising to more than $2.34B after collateral liquidation. The precise totals are not load bearing. The correlation argument and the counterparty transmission are.
The variance arithmetic in part two assumes equal position sizes and equal volatilities, which is a simplification. Unequal sizes widen the gap between the independent and correlated cases rather than narrowing it, so the conclusion is conservative.
S209-03 owns account architecture, being how holdings are separated across accounts and custodians. This lesson owns risk aggregation across open positions. R411-05 applies the same aggregation inside an automated system. Keep the split.