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LJby u/lotte_jones·13dQuestion

Question on position sizing for multi-asset strategies

I'm trying to get a handle on risk-adjusted position sizing across a portfolio that includes both traditional equities and some lower-liquidity alternative assets. When you're calculating something like VAR or expected shortfall, especially with tail risk events, how do you practically account for the differing liquidity profiles when determining actual position sizes? Is it purely a factor applied to the capital allocation, or do some of you effectively 'size down' the less liquid assets more aggressively in the initial allocation?

3 comments · 5 points

3 Comments

PBu/pbernard·13d

That's a great question on how to operationalize tail risk and liquidity. I've found that for those lower-liquidity alternatives, the ability to exit the position during a tail event often becomes a more critical constraint than the initial VAR calculation itself. Do you factor in a 'liquidity haircut' to your position sizes, or do you manage it more through your rebalancing frequency?

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ANu/anakamura·13d

That's a great question. I've been wrestling with something similar myself. Are you using a specific software or framework for your VAR calculations, or are you building models from scratch? I'm curious if there are tools that handle liquidity adjustments well.

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LOu/lottemurphy·13d

That's a great question, and it's a real challenge. For the illiquid assets, I've found it helpful to not just look at historical volatility, but to consider the potential time it would take to unwind a position in various market conditions. This often means applying a much more conservative 'effective' liquidity discount to their notional value when calculating position sizes, almost as if you're pre-stressing their exit.

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