Designing a Risk Overlay for a Diversified Futures Portfolio
Summary
The document describes how to add a risk overlay to a systematic futures strategy and where to place it in a process that uses dynamic position optimization. The overlay scales unrounded target positions by a multiplier, while separate controls address instrument-level leverage, aggregate notional exposure, and instruments with very low volatility. It discusses risks from high expected portfolio risk, volatility spikes, unusually low volatility, and correlation shocks, then distinguishes controls embedded in the system from production limits applied offline.
The method includes setting a minimum instrument volatility based on portfolio and leverage assumptions, imposing hard contract limits using contract notional exposure, and constraining aggregate absolute notional exposure. The author explains why the overlay belongs upstream of integer-position optimization: adding it later could disturb optimized contract counts. The article gives formula-based examples and notes that hard position limits are production controls absent from the main backtest. Its parameter choices and implementation are specific to the described system, and the text does not report a performance evaluation of the revised overlay.
Key ideas
- A risk overlay can scale target positions according to portfolio risk before integer position optimization.
- Separate controls can limit instrument-level and aggregate notional leverage.
- Minimum volatility filters can avoid instruments whose low risk estimates imply excessive leverage.
- Applying a multiplier after integer optimization may disrupt the optimized contract positions.
- Production position limits described here are not included in the main historical backtest.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.