Soft Stop
A soft stop is a flexible risk control point where trading is paused or reviewed, not automatically halted, allowing managers to reassess strategy.
What Is a Soft Stop?
A soft stop is a predefined threshold in trading or investing where activity may be paused or reviewed due to underperformance or risk concerns, but is not automatically halted. Unlike a hard stop, which triggers a mandatory exit or liquidation, a soft stop offers flexibility allowing managers or traders to reassess the situation, justify continued activity, or make adjustments before taking further action.
How Does a Soft Stop Work?
Soft stops are typically set based on factors like portfolio drawdown, volatility, or deviation from expected performance. When this threshold is reached, the manager or trader is expected to review the strategy’s behavior, analyze market conditions, and decide whether to continue, pause, or adjust the position. This process is discretionary and often outlined in a fund’s mandate or risk policy, with oversight from risk committees or allocators.
Why Are Soft Stops Important for Investors and Fund Managers?
Soft stops serve as early warning systems in risk management. They:
Encourage disciplined monitoring of performance without forcing immediate action
Allow for professional judgment and flexibility in response to unusual market events
Help prevent emotional or reactionary decisions by prompting structured review
Support transparency and accountability when shared with allocators or oversight committees
Example: Soft Stop in Practice
A multi-strategy fund sets a soft stop at a 7% drawdown from peak value. If the portfolio drops by 7%, trading is paused and the investment team reviews current positions, recent market events, and risk exposures. After discussion, the team may choose to continue, adjust exposures, or escalate to a hard stop if risks remain elevated.
When Should You Use a Soft Stop?
Soft stops are most useful:
In quantitative, macro, or multi-strategy funds where flexibility is needed
When managing portfolios that require oversight but benefit from discretion
As part of a layered risk management framework, alongside hard stops and other controls
Whenever early intervention and review can help prevent larger losses or operational errors
