Diversification and Contract Rounding in Small Futures Accounts

Summary

The document examines how small account size limits diversification when futures positions must be held in whole contracts. This creates abrupt position changes as forecasts, volatility, or account value shift, which can misalign risk targets and raise trading costs. It considers accepting this effect, reducing the number of markets, or using explicit binary or thresholded position rules.

The analysis compares diversification across portfolios of different sizes and evaluates sizing approaches using measures such as Sharpe ratio, returns, volatility, costs, and portfolio correlations. It reports that diversification improves as markets are added, while holding only one contract at maximum position can impose a substantial Sharpe penalty; the penalty shrinks as the account can hold more contracts. Thresholding may reduce correlations and costs, partly offsetting lower returns. These findings are specific to the described futures system and account assumptions, and the document does not provide enough detail to reproduce the full evaluation.

Key ideas

• Whole-contract constraints make position sizing discontinuous and can cause risk targets to be missed.
• Small accounts face a tradeoff between diversification and the ability to size positions smoothly.
• Thresholded sizing can reduce costs and correlations while also lowering returns.
• The reported Sharpe penalty from contract rounding declines as the maximum position increases.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.