I have been travelling in the last three weeks. One of my destinations was Tampa, Florida, where I attended Ralph Vince‘s Risk-Opportunity Analysis course, over a weekend (check here for a presentation of the course).
My main objective for attending was to strengthen my knowledge of Money Management/Position Sizing and my understanding of the concepts presented in Vince’s books.
The secondary objective was to gain an understanding of how to practically apply these concepts to Trend Following systems, and check what improvements the Leverage Space Model framework could provide.
This is not a full review of the course but more of a “teaser” post giving you a “heads-up” that several posts covering this topic will be coming on the blog – as I explore and test the concepts on real-life trading systems.
The course was dense and covered a lot of material with all of the mathematical formulas behind the concepts explained in the Leverage Space paper that was discussed on this blog. In a way, there is a large overlap with the contents of his Leverage Space Trading Model book, which expands on the concepts in the paper, with the Mathematics behind the concepts. The main ideas and concepts are the same.
The pivotal concept in the framework that Vince introduces is the multi-dimensional leverage terrain, which draws the return of a portfolio based on the leverage (position size) applied to each instrument.
The maximum portfolio growth is located at the peak of the terrain, resulting from the specific corresponding leverage (or f-values) combination. The terrain construction does not take into account correlation between the instruments – instead, the model uses the joint probability of two scenarios occurring simultaneously, dictated by the price data history.
During the course Vince showed us several ways to “navigate” the terrain and determining the corresponding leverage factors, based on different objectives: geometric return, risk of drawdown and probability of being profitable in the next “period”. Another concept developed was the idea of investment horizon.
The other aspect covered in the course was the software that implements the Leverage Space Model calculations, which you would typically use to evaluate the optimal combination of leverage for your portfolio based on your criteria/objective function.
We walked through several simple examples from the course using both software packages that implement the Leverage Space Model concepts
Vince used to make available on his homepage a java application that implemented the model. This is proprietary though and when I last quickly checked I could not see the link for it any more. You might have some luck obtaining a copy by emailing him.
However, Josh Ulrich, the author of the FOSS Trading blog and several R packages has implemented the Leverage Space Model in a dedicated R package. The implementation is actually faster than the Java software (so much faster that Vince’s java app now generates R commands to run the LSPM package functions instead of its own optimizer).
Josh was there in Tampa and it was great meeting him too. He definitely has a great handle on the Leverage Space Model and I strongly recommend following his blog if you are interested in this material. Take a look now if you are after more specific examples on how to get started with the package (which can be found on R-forge repository).
If I have a criticism about the course, it would be regarding the format. I would have liked to spend less time on the Maths behind the concepts (most of it is covered in the book anyway) and spend more time in a “workshop” format where we could have investigated the software with some of our specific cases.
I do not mind doing some homework on this after the course, and the fact that there is a google group where attendees can ask questions is useful, but being able to do this “in person” is probably better.
It has left me hungry for more (in a good way) and I am keen to explore some of the concepts more in detail. I anticipate several posts looking into this from a practical point of view in the next few weeks/months.
In the mean time, if you fancy getting started on this topic, you could take a quick look at Vince’s paper – in which he has managed to distill his ideas in a short, manageable 30 pages. – or a more in-depth look by getting his latest book on the Leverage Space Model. In any case you might want to get started on the software side of things by downloading the R package. It is very easy to get started with it.