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In applying this philosophy to trading, Kovner says it is not so much about being right all the time but rather being able to adapt and find a strategy that works. "I am wrong a lot. While the analogy may be pushing it, you can think of a painter painting many brush strokes. He can be wrong a lot; no one stroke is right or wrong. We are constantly painting a picture."

Kovner says they have losses all the time because they are testing ideas in the marketplace. The implications are minor; a loss tells you that something isn't right now. But if the losses are larger than predicted or expected, those losses have to be examined. Why? What happened? What was wrong with the analysis? Kovner is most concerned when risk levels are exceeded. The teams are given maximum risk levels and they can trade within acceptable risk levels.

RISK CONTROL, RISK CONTROL, RISK CONTROL

When asked what his edge as a manager is, Kovner acknowledged that it is a "complex game we are in and the edges are subtle. . . . In real estate, the key is location, location, location. With money management, the key is risk control, risk control, risk control." He spends considerable time and resources on understanding and managing risk. Kovner says that unlike other hedge fund managers, he usually takes smaller positions. "We don't like to see big volatility in the fund. We have seen volatility steadily lessen in the last five years as we understand risk better. It is probably half what it was five years ago."

While Kovner uses leverage, it is used cautiously. If leverage is a feature of hedge funds, leverage magnifies the mistakes as well as the benefits. There are plenty of ways to get returns but there are plenty of ways to lose it, too, says Kovner.

Kovner notes it is difficult to measure how much leverage he uses. He acknowledges that the term "leverage" creates lots of confusion. "We measure risk precisely every day. We do lots of analysis on risk. The term 'leverage' doesn't specify risk."

Caxton has a department that focuses on risk management, and risk is measured in many different ways. Considerable stress testing is done on the portfolio every day. That is, what happens if there is a big shift in stocks? What if interest rates change or a political crisis occurs? While Value-at-Risk (VaR) is measured every day and the numbers are very