Selecting Futures Markets by Diversification, Trading Cost, and Contract Size
Summary
The document describes a systematic way to select a fixed subset of futures markets for an account with limited capital. It first filters for liquidity, then estimates each instrument’s expected trading costs and the penalty from contract sizes that prevent sufficiently precise position scaling. Instruments that are too large to trade economically are heavily penalized, while feasible candidates are ranked by estimated net Sharpe contribution.
After choosing an initial market, the method adds instruments iteratively: it constructs a portfolio for each candidate addition, assigns weights using a handcrafted weighting method, and selects the market with the strongest estimated portfolio Sharpe after accounting for expected instrument performance and correlations. The author supplies example rankings and a proposed reduced portfolio, but explicitly does not backtest annual reselection, since realized performance is not the selection objective. The estimates rely on assumed performance and size penalties, and the author cautions that past performance is not robust enough to drive these capital allocation decisions.
Key ideas
- Market selection should account for liquidity, transaction costs, diversification, and contract granularity.
- The method penalizes instruments whose contract size prevents reasonably precise risk targeting.
- It builds a portfolio greedily by adding the candidate that gives the best estimated portfolio Sharpe.
- The proposed selection approach is not validated through historical annual reselection in the document.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.