Know your 'risk v's reward

The Portfolio Platform has now been live for the best part of a year and is gaining traction rapidly from a wide range of interested investors.

Some like the idea of being involved in the investment, being able to see that Dashboard and feel a sense of ownership over the decisions being made with their money. Some just like the fact that they can reap the reward of leveraged returns while knowing that traders with vast experience are trading their books for them.

All the feed back is good and we are delighted that we are able to help retail investors enjoy putting their capital to work. On the back of this enjoyment, we thought that perhaps everyone would enjoy it even more, if we took some time out to explain some of the more technical figures shown on each trader’s tile page.

We can also give our own interpretations of the figures, and let you know who is currently posting the best risk reward ratios on Platform.

To start with, I will go through the various numbers posted on the trading teams page with a brief explanation of what it means. Then, over the next few weeks I can explain each one in a little more detail.

Max Drawdown: This is important as it the largest peak-to-trough historical loss of the account since inception. While it is not necessarily an indication of future performance, it does give you a good idea of the level of risk being applied to the strategy.

The Profit Factor: This is the win-to-loss ratio and it is calculated by dividing the total trade profits by the total trade losses.

Suggested Minimum Capital: This is not the actual minimum you can invest in a strategy, but the automated recommended amount given the size of the trades placed by the team. It is possible to invest less than this, but if the scaling is too small, you might miss a trade or two.

Sharpe Ratio: The Sharpe Ratio has become the most widely used method for calculating the risk-adjusted return on an investment. In essence, the greater a portfolio’s Sharpe ratio, the better its return is relative to the risk being taken.
Generally speaking, a Sharpe ratio greater than 1.0 is considered acceptable to good, by investors. Anything higher than 2.0 is very good and better than most funds out there.

Sortino Ratio: The Sortino ratio is a variation of the Sharpe Ratio that differentiates harmful volatility from total overall volatility.
The numbers here are very similar to the Sharpe ratio with anything over 2.0 being considered very good.

Leverage: This number gives you another indication of the risk taken. If an account buys 200 shares for £50 per share, meaning the position is long £10,000 worth of shares, and the equity on the account is £5,000, then the leverage is 2. It gets a little more complicated when measuring the risk of futures, but I will explain this further next week.

With this in mind, let’s look at a couple of strategies. As our ‘stock picking’ strategy let’s take a look at Value Driven Growth
which has performed well over the last year. After 5 months of 2021, this strategy is up 17.4% on the year. This is pretty solid by anyone’s standards especially given the recent drop in US equities and the elevated volatility.

Max Drawdown only 8.3%. This means the most they have lost in any one period is only 8.3%, one of the lowest on the platform. They have a Sharpe ratio of 2.33 and the Sortino ratio 4.66.

This is a fantastic performance but there is one strategy that really stands out at the moment and that is the European Stock Basket. Up 36.7% on the year with a Max Drawdown of 13.1%, but most importantly a Sharpe ratio of 3.64 and a Sortino ratio of 9.42. These are better figures than I have seen anywhere.

The average leverage is a lot higher on the ESB, as it is predominantly a futures strategy, with an average of 2.82 compared to 1.11 on Value Driven Growth, but that just means using leverage at the right time, and stepping back at the right time, has produced the best results (through classical analysis) on The Portfolio Platform.

If you have been linked to the European Stock Basket since we signed them in October last year, you have made a cumulative return of 148.9%. The markets are moving a little more sideways at the moment but long may this run continue.

At The Portfolio Platform we only have the best traders we can find and they are available to you to autotrade. Let them make the hard decisions so you don’t have to. We are providing the middle ground between hedge funds, and retail investors. It’s professional trading, for the average investor. For a free simulation account, sign in here. You can monitor the traders and see the results for yourself before taking the next step and building your own, personalised fund built up of traders selected by you, but already vetted by us.

Click here to register for free at The Portfolio Platform.

If you would like to find out more, schedule a call with our team- click here.