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C2 Star Mathematically Impossible on the Long Term

Check me on this. I believe I have it right, but I could be wrong.

  1. Subscription fee must be $125 and autotrade cost is calculated at $50.

  2. Capital must be between $40K and $60K

  3. Initially the $125 subscription will be a 0.35% drag per month or 4.2% per year on an account of $50,000

  4. ASSUMING a strategy does well and stays certified and grows to $60,000 requiring it to scale down to $40,000.

  5. The $175 is still applied to all previous months based on the new scaled down starting value, just like with other non Star strategies.

  6. If the strategy started with $50,000 after scaling it will have “started” with $33,000 since $40K/$60K*$50K

  7. Now instead of a 0.35% drag per month in the first month of the strategy it will be $175/$33,000*100% = 0.53% or 6.6% per year.

  8. After scaling just twice the drag per year will be 9.9% which is roughly equal to the max drawdown allowed.

  9. You can approximate the drag in any given year by simply saying each time you scale from $60K to $40K you increase your annual fee by a factor of 1.5 since 60/40=1.5.

Now this is a long way off for most strategies since most don’t have to scale down that much since they quickly hit the 8-12.5% max drawdown. But I think it is important to take note of.

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Interesting. I believe that Mathew has stated that AutoTrade fees are not included in the performance calculation.

When a strategy is scaled down is the subscription fee also scaled down for that period? I always assumed that it would be or else your drawdown would also be adjusted lower if it wasn’t. If not that is a big hole you’ve discovered.

I’ve tried To create a few different CStar strategies. For me the hardest part is meeting the 2.5% deployment of capital in closed trades. That threshold drops to 1% after a few months. I don’t understand why it starts high and then drops to reasonable level except to force strategies to take on too much risk.

Now that you say that I maybe remember him saying the AutoTrader fees aren’t included. However, then it would be the same calculation just starting with a 3% annual fee rather than 4.2%. I believe the current monthly fee is applied in full to every month whether a strategy has been scaled or not.

AutoTrade fees are included.

But Dwight’s point is, if a strategy is successful for long periods of time, and is forced to “rescale” back to $50K a few times, that implies that the Starting Capital of the strategy keeps getting smaller and smaller, by a factor of about 20% per rescale.

So after 1 rescale, Starting Capital seems to be $40K
Then after 2 rescales, Starting Capital seems to be $32K

Etc.

Since the current monthly costs are retroactively projected backwards onto starting capital, this does indeed suggest that % returns for those months will be calculated as lower than prior to the rescale.

However, the way C2Star works is that these historical recalcs will not affect current C2Star status. In other words, after a rescale, you won’t suddenly be told, “Hey, guess what, based on the rescaling you just did, you suddenly got dropped from the program because six months ago your performance wasn’t high enough.”

C2Star requirements are always in a go-forward mode.

That said, I agree that this isn’t the best way to handle rescaling. I’ll try to work on making rescaling use historical cost structures when calculating historical performance. (As it stands today, C2 is being overly conservative and using costs that are much higher than were actually in effect.)

Good catch.

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I feel like I got an A+ haha. Glad I’m not crazy and that you are going to look into it. Thanks Matthew!

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Nicely done, @DwightSchrute! Your research is here is very helpful and your candor in various discussion threads is often refreshing. Keep at it.

~ recon

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