How is Performance of Combo Strategy Calculated?
Author: cicerotullius
Creation Date: 8/2/2015 5:19 PM
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cicerotullius

#1
Dear WL Team,

How does WL calculate the Performance of Kombi strategies?
For the Example: lets assume that I have a Stragtegie A and B and want to combine them with 50:50 in equity mode and I also assign positions based on % equity.

Capital Pool:
My understanding is that If I combine strategie A + B with % Equity then this would mean that every day WL takes the COMBINED capital of the day and assigns with % equity and % position size the new Positions size. This would also mean that its a combined capital pool.
PE: if Starting capital is 100.000 and on the first day Strategy A makes 20% and Strategy B makes -10% then this would mean that for Day 2 there is a combined capital of approx 105.000 so now each strategy takes 52.500 as a capital, if then on Day 2 its the other way around and Strategy A makes -30% and Strategy B makes +10%, then the capital for Day 3 would be approx .94.500

or: split Capital
What I observed with WL is that it does the following: (again with % equity and % position size)
it splits the Capital in the very beginning of the Backtest period and it then continues to calculate both strategies in parallel as if they would be on separate accounts/capitals. to take the above example this means:
for Day 1 we have 50.000 each and we end the day with 60.000 for Strategy A account and 45.000 for Strategy B account, but on Day two now Strategy A continues with 60.000 so goes to 42.000 and Strategy B to 49.500 which now equals combined 91.500.

Of course I took extreme numbers, but this is to show the effect, lets just imagine that somebody has a high performing strategy and one with quite a low performance, but the one with the low performance delivers this performance exactly in the DD period of the other one, in this case it makes a incredible difference if it is calculated with capital pool or combined capital.

Can be as well seen if you calculate the position sizes out of the Trades overview, if you have 2 Strategies with substantial APR difference then after a few years of backtest the last few positions do not add up to your % equity input.
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Eugene

#2
Hi Gernot,

QUOTE:
What I observed with WL is that it does the following: (again with % equity and % position size)
it splits the Capital in the very beginning of the Backtest period and it then continues to calculate both strategies in parallel as if they would be on separate accounts/capitals.


Your observation is in line with the FAQ where this behavior has been described long ago:

FAQ | Strategies and WealthScript > Combination strategies > Is child strategy equity being constantly readjusted on a day-to-day basis with regard to the "Percent of Starting Equity" allocation?

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Supersol

#3
Dear Eugene,

I wanted to ask, if there could be a workaround to receive the capital pool solution Gernot is talking about. The only solution I can think about is combining two strategies in Excel, which is quite inelegant.

In my opinion the capital pool would make more sense in terms of smoothed results when combining different strategies with different approaches.

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Eugene

#4
Hi Mathias,

Since this is the design Wealth-Lab adheres to, I'm simply not in the position to develop a "workaround" that would exceed the original functionality. Here's a decommissioned technique from the Wiki Knowledge Base that may be useful in this context or not:

WealthScript Techniques | MultiSystem, or Calling a Strategy From Another