Portfolio Risk Management

Hi, I am currently planning to start my own hedge fund, and I’m having a really hard time crossing this one obstacle: Risk Management.

I don’t know how to go forward regarding this. Do we allocate our portfolio using percentages (certain percent of capital goes in certain sectors/certain caps with room for trading) or do we base our portfolio around a risk equation which would dictate the investments?

I’m generally leaning towards the risk equation, but I don’t even know how to begin to formulate one.