When sector weight is used as a buy rule does the buy algorithm consider the before or after weight? The reason I ask is that I have an R2G model SP500 Market Neutral (Long 8 Stocks + Long SH) IRA Compatible with the buy rule SecWeight < 15. However the current allocation is clearly much higher.
I had the same question.
From my experience, the only way to make sure you do not have more weight then your limit is use weight limits in the sell rules. Buy rules are only considered at the moment of the actual buy.
You can also ‘trim’ your position to make the reallocation a bit smoother, e.g. Sell Rule: Eval(SecWeight > 15, 0.80, 0)
Hedgehog - growth of a holding doesn’t explain my problem.
I think that the answer may be that the sector weight is applied against the total equity, regardless of the fact that I have 50% hedge. The allocation pie graph that P123 generates only considers the long stock holdings not the ETF (hedge). So there is probably a lack of consistency in how weight is calculated.
Steve
Market_Neutral - Ok, I think I understand your issue. I have never used any ETF models, but my assumption is that P123 does not have the ETF data that you can find on Morningstar such as holdings, sector, industry weighting etc., and therefore cannot take these weightings into account.
Hedgehog - I’m not referring to the sector holdings inside the ETF. What I am saying is that the ETF accounts for 50% of the portfolio equity. A sector weight of 25% applies to all of the portfolio equity not just the long stocks. So the stock holdings can actually have 50% in one sector if you only consider the equity held by long stocks. Does that make sense?
Get it 
I checked your R2G description and from what I understand is that 50% of the portfolio value is always invested in a short S&P 500 ETF. Wouldn’t a solution be just to halve your max weightings? E.g. Use Eval(SecWeight > 7.5, 0.80, 0) in your sell rules instead of Eval(SecWeight > 15, 0.80, 0).
Edit: Of course the complete portfolio weightings will still be unknown as you short an unknown sector weighting from the ETF.
The “complete portfolio weightings” is not of concern to me as I assume that the short ETF sectors are fairly distributed. I’m only trying to reduce risk by not allowing a concentration of stocks in one sector.
The answer may be to halve the maximum sector weighting allowance. But I want to make sure there isn’t a bug…
It goes like this… each stock buy is 12.5% +/-tolerance. If I set the maximum sector weight at 15% (at time of buy) I see ~4 sectors with three sectors being ~30% weighting and two stocks in each sector. If I set the maximum sector weighting to 13% (at time of buy) then I see 8 sectors, one stock in each sector. It may be some sort of tolerance issue as there is a tolerance on the hedge as well. But it kind of looks like a bug to me.
In any case, I think it would be poor system design to have the maximum % position be specified excluding hedge, SecWeight including hedge, allocation pie chart excluding hedge and cash. Not sure about Weight? And what happens when hedge is switched in versus switched out?
Steve
Marco - can you have a look at this sector weight issue?
Thanks
Steve
The Holdings->Allocation page ignores cash & hedge. We’ll put a notice so there’s no confusion. It’ hard to include the hedge in the pie charts because it has no sector nor marketcap. I suppose we could have an “N/A” slice. Not sure what to do with short hedges though.
For accurate weights click [downloads] in the holdings. Seem ok.
Marco,
It would be better (more clear), to simply apply the ‘contraints’, like sector weight to the non-hedge, non-cash portfolio. I think that’s how most of designers (if not all) think about it. That way the long-side is always ‘risk managed’ based on these…regardless of cash or hedging.
Especially if a hedge has timing to it, designers can’t work around this if it’s not done this way. Not easily.
Best,
Tom
I agree with Tom’s point. Regardless of whether or not there is a hedge, the SecWeight (and other variations) should be relative to the stock holdings. Otherwise the system is effectively being modified when a hedge is switched in, requiring the weights to be adjusted to compensate for the hedge.
Also, how is Weight calculated? Does Weight include the hedge or not? We need consistency throughout… SecWeight/IndWeight/CapWeight, Weight, and the pie graph. Otherwise there will continue to be confusion.
Steve