The reasoning behind "rescaling" strategies

[jsmith_qam]

@GSPTrader

The cumulative return index is not workable. Let’s say that an account is down 50%. The percentage gains, losses, drawdowns, and margin requirements would actually be twice the amount calculated on a nominal starting equity.

Exactly, that’s way I said that we should monitor that the maximum drawdown (cumulative) is smaller that the excess equity after margin requirement. If this is broken at any point is a red flag for the strategy.

@GSPTrader

An index is the historical record of performance. Do Dow-Jones or S&P 500 go back and recalculate their index every time a stock splits or is added or dropped? Of course not, the history is locked in. The fractional contracts shown in C2 history tables would be of value to just show the source of the gains and losses. They were one contract or more when the trades occurred.

That is not the point. The idea of use using a cumulative PnL index over a composite index is to avoid cases where the historical PnL of a strategy would not had been replicable to an investor starting with the declared equity sizel of the strategy after it is rescaled. If all past “locked-in” gains were only attainable by trading, for example, 0.33 ES + 0.43 GC contracts for the current strategy equity size, then those PnLs are completely meaningless for an investor starting the strategy today.

If you use VADI to evaluate a strategy, fractional trades like those can be hidden, and past returns might not be realistic for the current declared strategy size.

[GSPTrader]

You are confusing money management with performance recording. The example of an account down 50% was just that, an example. The same mathematical distortions would occur if an account is down or up 30%. “Red flags” have no meaning for recording performance.

The cumulative performance used by C2 in the performance tables is a compounded number, in accordance with NFA reporting requirements. This is the standard calculation for CTAs. By what logic do you calculate intra-month results arithmetically, yet multiply (compound) the sum of the daily results monthly?

You are making this too complicated. Fractional contracts after a split were full size contracts when the trades were done. If a one lot trader continues to trade one lots after his account is split, then this will be obvious compared to his historical trades which will be shown as fractional contracts. Of course, his volatility and daily performance will change. So what? The purpose of the performance record is to offer a way to compare different systems. The current way of rescaling has been a big problem for many successful systems.

[Cameron]

The truth is that there is no right way and every way has its pros and cons. That said I really believe VADI is the best way forward.

• No more rescaling
• Historical fees would finally make sense (currently they are not rescaled which means my strategy suffers a ridiculous 20% management fee drag on my early returns)
• There will still be an argument about fractional lots but that’s already the case anyway
• Will need to add historical maximum cumulative drawdown statistic
• Will need to add historical maximum cumulative dollar loss statistic

What do we think? Lets get this ironed out and come to an agreement and then we can make a proposal to C2.