RISK MANAGEMENT

I consider risk management a key element of the investment process. A strategy's advantage is only meaningful when it's wrapped in coherent exposure control principles. Therefore, I've implemented risk management in my portfolio at two levels: the portfolio (control of the total exposure of all strategies in the portfolio) and the strategy (risk discipline within each system). In practice, this means that both the portfolio and the strategies have built-in rules that manage concentration, correlation, long/short tilt, and volatility risk.

Risk Management at the Portfolio Level

This layer ensures that even with multiple simultaneous signals from different strategies, the portfolio as a whole remains balanced, diversified, and resilient to less favorable market conditions. All trades that pass risk screening at the individual strategy level are then reviewed by a set of portfolio limits. This serves as a second, overarching layer of transaction filtering and exposure control, mitigating risks arising from concentration, correlation, and cumulative exposure across the portfolio.

Risk adaptation after capital drawdown

When drawdown exceeds 10% , the portfolio automatically reduces the risk level of new positions by 20% . I use this to limit the rate of deepening losses and stabilize the equity curve during periods of weaker market conditions or underperforming strategies.

Limiting concentration on a single instrument

The maximum exposure to a single instrument is limited to 3 units . The goal is to ensure that the portfolio's performance is not effectively dominated by a single instrument and that idiosyncratic (market-specific) risk does not unduly impact the portfolio's performance. Even a well-executed strategy can "miss" in a particular market – the limit protects against a situation in which a single error or exceptional movement in a single instrument causes a disproportionate impact on the portfolio.

Correlation and real diversification control

I limit the number of simultaneous positions in the markets:

strongly correlated to 5
less correlated to 8

This limits the risk of building a portfolio that appears diversified on paper, but in market stress behaves like a single, cumulative bet on a common factor. Correlation limits reduce the risk of "everything moving at once" in an unfavorable direction in market stress.

Directional exposure control (long/short)

I make sure that the portfolio does not become unintentionally one-sided:

the net advantage of one direction is limited to 10 units ,
Gross exposure is limited to 15 long units and 15 short units .

This maintains a controlled directional profile even when multiple strategies simultaneously generate signals in the same direction. These limits keep the risk profile closer to the assumptions, regardless of momentary signal convergence.

Volatility Limits (ATR)

I also control risk through volatility exposure limits, calculated based on the daily Average True Range (ATR). The goal is to maintain the portfolio's total volatility within pre-defined limits. If any of the limits are already met, or if adding a new unit would exceed any of them, the system automatically blocks the transaction (similarly to other portfolio limits).

I use three independent volatility exposure limits:

net volatility (long-short spread): 4% of capital
Directional volatility (on one side of the market: long or short): 5% of capital
gross volatility (sum of long + short): 6% of capital

These limits are primarily intended to prevent further risk accumulation once the portfolio has reached its upper acceptable volatility threshold. In my personal opinion, these limits have the greatest added value at the portfolio level and, in many cases, can significantly improve the portfolio's risk-reward.

Risk Management at the level of a single strategy

This layer ensures that each strategy operates within a structured framework and within an acceptable risk level. This is an important element of risk management, because even with robust portfolio limits, a single strategy can overextend its exposure if left unconstrained. This ensures risk is controlled at the source—at the signal generation and position building levels.

Strategy Correlation Limits

I limit the number of simultaneous positions in the markets:

strongly correlated to 3
less correlated to 6

The goal is to prevent a single strategy from building exposure that effectively duplicates a single risk factor. This limit therefore forces real diversification within the system before the exposure is transferred to the portfolio.

Directional Strategy Exposure Limit

A single strategy has a maximum directional exposure limit of 12 units . This limits the risk of a single system taking control of the portfolio's direction, especially during periods of strong trends or a series of signals in the same direction.

Volatility Limits (ATR)

For trend-following strategies, I limit the volatility of a single position and the entire strategy based on the daily Average True Range (ATR). This allows the strategy to reduce exposure to instruments whose current volatility is too high, as well as to all positions combined when the volatility of the entire portfolio is exceeded.

I use:

volatility limit of a single instrument (ATR): 0.5% of capital and permissible deviation (tolerance) from the limit: 0.5% of capital
gross volatility (sum of long + short): 10% of capital

These limits are intended to limit situations in which a single instrument, due to increased volatility, begins to introduce a disproportionately large risk into the strategy, or the volatility of the entire portfolio exceeds a predetermined level. Applying a tolerance stabilizes the filter's operation near the threshold and limits frequent "switching" of decisions at threshold values (when volatility fluctuates around the limit).

The end result: the portfolio controls exposure on several levels simultaneously – limiting concentration and correlations, monitoring long/short tilt, filtering excessive volatility, and automatically reducing risk after a drawdown. At the same time, each strategy has its own "risk framework," allowing the entire portfolio to maintain a more predictable risk profile across various market regimes.