Here’s our point of view:
Measuring Drawdown/Risk at a Strategy level and at a Fund/UserPortfolio level are two entirely different aspects.
We measure each strategy’s risk profile using factors such as Calmar/Drawdown ratio, APD, %Winning months, e.t.c. A strategy with a high APD is capable of returning out of drawdowns quicker than say, a Scalper algorithm which has high success rate but a low APD. On the other hand a strategy with a high Calmar ratio can be deployed on lesser capital with higher leverage and can be easily paired with other strategies or Fixed Income.
At a Fund/Portfolio level, the focus shifts to improving Sharpe Ratio while reducing Max Drawdown to the client mandate. This can be achieved through diversification. You can consider (a) running the same strategy on uncorrelated instruments, (b) running different strategies, © choosing how to employ profits generated, e.t.c.
Here’s an example to illustrate the point:
We filtered the Grid for all C2 systems having C2 Score > 95, Age > 60 days, Trades > 60 and Sharpe Ratio > 4. This gives two strategies with entirely different performance metrics as shown below.
Next we created a Portfolio of $50,000 allocating equally to each of the strategies. And we get a combined portfolio which has better Cumulative return and lesser Drawdown than either of the individual strategies.
To a strategy developer, we would suggest that the focus should not just be on reducing $or% Drawdown, but also on improving factors such as Calmar Ratio and APD. It is the Fund manager/C2 users’ responsibility to judiciously deploy capital and employ leverage in a manner that keeps Drawdown within their expected limits.
Disclaimer: We are the owners of TickPrime SP500.
Regards,
ACA
