Positionsizing market-neutral strategies

Discussion in 'Strategy Development' started by giggollo, Nov 11, 2006.

  1. You have 2 systems, one long and one short. You start each system with $100K and decide to resize the capital allocated to each system on a weekly basis.

    After 1 week, your short system is down $20K and your long system is breakeven. You want to reduce capital allocated to your short system by $20K to reflect the recent poor performance of the short system. However, if you do that you will be long $100K and short only $80K intraday, thus exposing yourself to larger drawdowns if the market sells off.

    The question is: do you

    a) treat both systems as "one big system" and reduce exposure to both systems equally, thus punishing the long system, or

    b) reduce only the short system and lose your perfect balance between long and short exposure?
  2. if your aim is to stay neutral un ought to reduce both positions size. once u reduce one but not the other u introduce some kinda directional bias.
  3. Nice thread. :)

    If I had a market neutral trading system and the Long portion was at breakeven while the Short portion was down by 20% I would do the following:

    a) Re-examine my criteria for entering trades. The system should at worst be at breakeven, period. I would reconsider what are good short candidates (and carry that over into my long-side trading criteria).

    b) While I am re-working my system, I would hold the money management algorithm at a consistent 50/50 split (common equity pool).

    This will allow you to survive longer, control losses and allow you to grow your portfolio in a consistent, organized, methodical manner. The Long winners won't hold sway forever, and maintaining a constant ratio will keep you from being over-weighted when they turn down and the Short side of the portfolio rules the day.

    c) I obviously think trading in a market-netural strategy is a good idea.


  4. maybe you should let the overall market trend dictate a short or long bias. Weight your long system heavier in an overall uptrend in the market; weight your shorts heavier in an overall downtrend. In a flat, choppy market, or when you are unsure, even out the longs and shorts.

    There is nothing wrong with carrying a net short or net long position under different market conditions. You would still be better protected than most investors and many traders with a 10%-20% net long position in the case of a market meltdown.
  5. minmike


    Depends. Are the stratagies the same/mirror images of each other? If one is trend following and one is range bound, teh answer is different than if they are looking to the same type of behavior, jsut different directions.

    The other question, is what did you do when you back tested them?
  6. Interesting, so what would you do in the case where they are mirror images of each other, and what you do if they are not?

    For backtesting, assume a fixed positionsizing method was used, ie it was not varied based on performance (eg always use $10K positionsize)
  7. minmike


    If they are mirrors, and you backtested set capital, I think you would want to keep it that while trading.

    If they systems are different and trying to capitalize on different market conditions (volatility or trend vs chop, not direction) I would say swing capital to what is working more.

    If trying to stay direction neutral is a core of your strategies, then you need to do that.

    Just my 2 cents.
  8. I see, but since one system is long and the other is short, wouldn't they be, by definition,

    " different and trying to capitalize on different market conditions "
  9. minmike


    No, you could have two "breakout" systems with slightly different conditions for long and short.

    Or you could have a "long term, long only, trending following system" with a "short term over bought reversion stratagy".

    Horrillibcus (sp?) talked about something like thsi in a thread that I think was called "trading multiple systems"
  10. The original question was asking what you would do if you had 1 long system and 1 short system. I just realized though that, if you have multiple long systems and multiple short systems, and one of your short systems kept losing money, you could reduce exposure in that system, and "make up for it" by increasing the exposure of your other short systems. This allows you to remain market neutral overall while adjusting your exposure to each system.
    #10     Nov 29, 2006