Strategic way to allocate to the VP

[pmward]

Yeah you can do that. Before settling on my quant strategy I also fumbled around with the idea of having the PP be my "home base". Basically, in those times when I'm uncertain I sit in a standard PP. During times I have some certainty allowing myself to operate along the edges. Say letting myself have 20% of my portfolio to use either with discretion during times it either I or some strategic signal tells me the coast is clear. Or maybe using leverage or duration on certain assets during periods I'm more bullish or bearish. Like say staying 4x25 but moving bonds from TLT to IEF and stocks from SPY to SSO when I'm feeling really bullish on stocks. There are a few ways it can be done. Kelly Criterion can help on speculative bets, but the difficulty is the exact odds of winning in the markets are never truly known and they always have to be approximated. But using that as a basis is better than just trading by feel alone.

[pmward]

I know another known issue with the Kelly Criterion is that it doesn't work for finite betting opportunities so when using it to assess one off trading opportunities it may not be appropriate too.

But when I look at what I'm doing with the PP as my VP, I can say that I am taking an infinite series of bets on the PP so it works in that regard.

That is a good point. There is no way to invest without making a bet. Even a diversified buy & rebalance portfolio is still taking a bet that this strategy will continue to perform going forward reasonably in line with its past performance. There's never any such guarantee. The past could very well be the anomaly. There's a big difference between the probability of "winning" investment returns and the probability of winning a hand of blackjack. There are no "unknown unknowns" in blackjack, and the rules never change mid hand in blackjack like they can in the markets.

[pmward]

Yeah you can do that. Before settling on my quant strategy I also fumbled around with the idea of having the PP be my "home base". Basically, in those times when I'm uncertain I sit in a standard PP. During times I have some certainty allowing myself to operate along the edges. Say letting myself have 20% of my portfolio to use either with discretion during times it either I or some strategic signal tells me the coast is clear. Or maybe using leverage or duration on certain assets during periods I'm more bullish or bearish. Like say staying 4x25 but moving bonds from TLT to IEF and stocks from SPY to SSO when I'm feeling really bullish on stocks. There are a few ways it can be done. Kelly Criterion can help on speculative bets, but the difficulty is the exact odds of winning in the markets are never truly known and they always have to be approximated. But using that as a basis is better than just trading by feel alone.

What did you end up doing with your quant strategy.

Like I mentioned, the rational way to do it is to assess your time horizon for making that bet. You also have to be so sure that your quant strategy is exploiting an edge that is sustainable and I don't know whether you have evaluated the technical, fundamental, or behavioral reasons for your edge and how scalable that edge is. Of course this is the holy grail of quant trading.

My biggest issue with quant trading and hedge funds is that by nature it has to be a black box and past performance can be explained by them just being outliers. I'm sure some people can look to Renaissance and have no problem concluding that they do have an edge. That edge could be exploiting speed and insider information. At some point if you recognize that any edge beyond what is fairly compensated from the systematic risks might be due to some kind of inside information then maybe we get into the realm of ethical returns.

Here's the thing.

For many people, just using conservative sized kelly bets on the PP, fully insured against known risks, given a conservative lifestyle following Harry's rules of life it can already be a game changer and the strategy is fully scalable and you can openly talk about it without any alpha being eroded because it doesn't rely on alpha.

You can see the basic recipe I tapped into in this thread here: https://www.gyroscopicinvesting.com/for ... 10&t=11557

I leveraged some existing systems from Paul Novell and added some custom seasoning in where applicable. Volatility, trend following, and momentum have all been subjects I've been fascinated with and done a lot of research on in my spare time. Paul had existing systems that leveraged those, and also included an economic data layer as well. Basically, yeah I have put a lot of thought into it and looked from multiple angles and I cannot find any technical, fundamental, or behavioral flaws in the system. I do think they will provide an edge over the course of a full market cycle. Have a read through that topic and we can talk further there if you have any questions or comments.

Obviously what I am doing is highly tailored to me as a person and as a trader. I find entertainment and joy in optimizing my investment strategy, looking at different systems, crunching numbers, etc. So it's more than just a way to make money for me. I wouldn't recommend what I'm doing to everyone. Most people would be better off just picking a simple buy & rebalance diversified portfolio that they can set and forget.

[Kriegsspiel]

Does anyone see any holes in this logic?

Personally, I wouldn't do it that way, since the money I can afford to lose isn't related to how good the Kelly Criterion looks.

As you said, it makes sense for you, so there's something to be said for that. Give 'er a whirl for a while and see if anything bad happens