How to Stop Risky Trading

Investors have always looked for ways to reduce risk. But in the wake of the financial crisis, some rather extreme methods are being used, with mixed results. Top traders, long at the apex of the finance food chain, are now being kept on tighter leashes at most banks and hedge funds. At BlueCrest, a top European hedge fund that's based on the isle of Guernsey, traders who lose 3 percent now have their capital base cut in half. Another 3 percent loss, and they're yanked off the trading floor. While this would seem a clever way to limit risky behavior (traders can get more volatile when they're down), it can also lock in losses. One veteran New York hedge funder says such loss limits actually hurt results because traders can become so risk-averse that they're too nervous to make any money at all.

Then there are the increasingly bizarre methods investment funds are using to tell if CEOs are lying—like bringing in former intelligence operatives to analyze executives' body language, and semiotics experts to pore over transcripts of conference calls, looking for suspicious patterns. One of the best-known companies doing this is Boston-based Business Intelligence Advisors. The practice is so secretive that a company spokesman won't say whether having ex-spooks analyze how often executives clear their throats or say "um" really saves investors any money. As ever, it seems, risk happens, and the only people guaranteed to get rich avoiding it are the consultants.

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