Many speculators face the quandary of having to choose among concurrent position taking signals from multiple trading strategies, while also being constrained by a prudent maximum leverage level.

Beyond a simple even-split method, one could rank strategies by historic drawdown, mean-return, Sharpe Ratio, or T-Statistic, etc., or perform a back-tested simulation of different strategy combinations and levels to determine the optimal allocation.

You could also choose a system, close-out positions when indicated, then rotate the funds into others indicated to still be open (but how have expectations changed?).

Perhaps a spec could choose a combination of strategies which would form the lowest absolute intra-portfolio sum-correlation construction and fund to maximum leverage.

I've used several of these selection methods many times, and of course there are others, but is there a method for selecting an optimal allocation among concurrent trading strategies?

Alex Castaldo says:

An approximate method which has become popular in recent years (I almost said "all too fashionable") is Risk Parity.  You would allocate capital to the strategies in inverse proportion to their standard deviation. So if one strategy has a standard deviation of 15% annualized and the other of 20% annualized you would allocate (1/0.15)/(1/0.15+1/0.2) = 57% to the first and (1/0.2)/(1/0.15+1/0.2) = 43% to the second.  There is no strong theoretical justification for this, and it implicitly assumes that the strategies are uncorrelated and have similar expected returns.  But it is a simple rule that is one step beyond equal allocations.


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