Thoughts on managing multiple uncorrelated trades at once?

asked by u/nbianchi · 11d · 2 answers

Still trying to get my head around efficient capital allocation when I'm in several positions that aren't particularly correlated. I mean, if I have $SPX longs, $JPY shorts, and maybe some $GOOGL calls, my overall portfolio risk isn't just the sum of individual risks. Are most of you sizing each position based on its individual stop loss and a fixed percentage of total capital, or are you looking at the net portfolio exposure when adding a new trade? It feels like the latter is more robust but also much harder to quantify properly, especially if the correlations shift. How do you approach this in practice without overcomitting on some days and undercommitting on others?

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  • u/e2e_apiowner· 1 pts· 11d

    I tend to size based on individual stop-loss percentages, but then have an overarching portfolio VaR limit I monitor. If the uncorrelated positions start to add up, I trim the smaller, less confident ones.

  • u/wei_adams· 1 pts· 11d

    This is a great question. I've been wrestling with how to properly account for the diversification benefit myself. Do you run any kind of Monte Carlo simulations, or are you mostly relying on historical correlations to estimate your overall portfolio risk?

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