The 'George Soros' Position Sizing method
- Thread starter Daal
- Start date
The strategy is nothing new, plenty of money managers use similar money management principles. It makes perfect sense for the client as their capital is not at risk, and perfect sense for the manager as he can compound gains faster while maintaining the same initial risk.
Compounding is a powerful tool in the right hands.
lol, kind of puts our efforts into perspective, I guess it's all relative though
Good risk:reward, what did he say 1 or 2% risk for a 15% return, I wouldn't mind doing that a few times a month!
as I said if he does this because of the clients then of course he is right. I'm just trying to find out the reasoning. he would be probably worth way more what he is worth today if he did not prevent himself from making big bets on trades with great potential simply because he is slighty down on the year. but if the clients will pull on a 25%+ drawdown then ok he is forced to cut back so he doesnt lose the incentive and mangement fees. but I did read that his fund is mostly his money and few other known individuals
when he feels he is right he gets a levered as possible.
Even with his own money I still think it's the right approach, psychologically and practically.
Even though logically it might be a fallacy, psychologically risking equity is tougher than risking gains. As he said, once you're on a roll then by only risking profit and a very small percentage of equity the thing just snowballs. When the roll ends then 'retrench', preserve capital, analyse what went wrong and in his words 'get the dynamic going again when you have a little profit under your belt'. His approach seems to focus solely on protecting principal which should be the focus for every trader I believe, and one of the reasons why he's done so well and has returned an average 35% per year for the past 26 years without excessive drawdown on principal. You've got to admit that's some record!
Is it better to risk capital on a big bet with great potential now, or is it better to miss a few opportunities and make some small bets first and then only be risking profits on a big bet?
Thanks for the link to the video by the way, good find.
If you are a sole trader, then yes this is pretty irrational in theory. However, if you have investors, and they look at each Jan 1st as a new blank slate, then it makes sense to adjust to their expectations. If they freak out at you losing 10% in January, but not 10% in December after being up 70% already, then you need to adapt to that. Soros is a fund manager after all, not an independent trader.
Another point is that psychology is real. Yes, the preferred solution is to develop a Spock-like detachment from the emotions of equity swings. However, if you cannot do that perfectly, then reducing size somewhat during drawdowns is a logical reaction, in order to maintain mental stability.
A further point is that a drawdown has a >0% chance of signifying your judgement is off, or not in sync with current market conditions. This is a further reason to cut back during drawdowns - your losses may not just be down to this trade not working, it may be down to some change in market structure or behaviour which you have not yet latched onto. In other words, losses over time increase the probability that your edge has degraded, and are thus a signal to scale back size somewhat.
Because of these 2 additional factors, the trader rule of thumb of using an anti-martingale is a good one, as long as not taken to excess.
It doesn't make sense because it would recommend a hugely different position size on December 30th compared to Jan 2nd, based on nothing more than a date change. Any client thinking this way about their own money is being irrational.
Capital IS at risk if you put on a huge position late in the year just because you are up a lot. Returns are missed by being too conservative just because you are at the beginning of a calendar year.
I must have missed the end-of-year part of his money management, did he mention it in the video?
How can capital be at risk if you're up a lot, surely it's gains that are at risk? If you're up 70% and want to risk 20% on a big bet it's not a problem. If it comes off then great, if not then 50% is still a good return.
Returns might be missed by being too conservative at the start of the year, that's the trade off for protecting capital. Start the year slowly and increase risk as profits are made, it sounds sensible to me and it works.