Everything you need to know about portfolio allocation

Portfolio Weighting 

An asset's percentage of a portfolio is its portfolio weighting. Once you allocate a certain weight to a certain strategy, you get your portfolio exposed to that particular strategy to a particular percentage. This means that the part of your portfolio that's allocated to the chosen strategy will replicate its properties. Another calculation for portfolio weighting is determined by dividing the current value of the asset(s) by the total value of the portfolio.

 

Portfolio Rebalancing

Portfolio rebalancing is the act of buying and selling assets to attain your desired weighting in each asset. With the crypto market being highly volatile, portfolio rebalancing is crucial to change your target asset allocation. Our strategies are mainly based on combinations of trend following and mean reversion models. Once a certain bot opens a position it won't close it to take profit nor to stop loss, but it will adjust the trade once the strategy it follows rebalances on the following trading window.

 

Rebalancing & Reweighting Strategies

Over time, as a portfolio’s assets change in price it can easily drift from the target position, moving the portfolio to a position that has inconsistent risk and return levels with an investor’s goals preferences. Some assets increase in weighting they may constitute a larger percentage of the portfolio; following the same logic, declining assets weighting falls and becomes a smaller percentage of the portfolio. If our strategies do not rebalance the portfolio, it will gradually move to high return and higher risk investments.

Portfolio rebalancing forces an investor to buy low and sell high. For example, let’s say you have a target allocation of 40% for the NapoX BTC Hourly 2 (Strategy A) and a target allocation of 40% for the NapoX ETH/BTC/USD Hourly (Strategy B). Then let’s assume Strategy A increases 50% and Strategy B declines by 50%. Now your exposition is 3 times as much of Strategy A compared to Strategy B because Strategy A has increased to 60% of the portfolio and Strategy B has declined to 20% of the portfolio.

After these fluctuations, not only has your strategy allocation drifted from the target weights, but now you are more exposed to a strategy that has just risen 50% and whose underlying may be overvalued, and are less exposed to a strategy whose underlying may be undervalued. Rebalancing allows your bots to short overvalued assets and long undervalued assets.

 

Understanding Net Performances

As it is stated on our website and in several articles of the FAQ, the performances we show are gross ones that do not include trading fees and slippage levels. Keep in mind that once you have created an account, connected an exchange and chose strategies you can simulate the net performance of your portfolio based on historical data. However, the concept of net performances can be confusing at times in can depend on funding and/or net positions.

 

Net Funding

Note that if your funding is not in fiat or stable coin, the performance of your funding will be added to the performance of the trading bots that you have selected. If you use Bitmex as an exchange for instance, your funding is in BTC. Supposing you only follow one strategy that happens to generate 70% performance over a certain period, and that Bitcoin's performance is 40% over the same period , then the performance of your portfolio is the sum of both performances. Now let us suppose you only follow one strategy that happens to generate a 20% performance over a given period and that Bitcoin's performance was -20% over the same period, in this case your net performance evens out leaving you with a 0% performance over the given period. 

 

Net Positions

The signals given by the trading bots are the positions to be taken on your account. Supposing that you just activated your bot for the first time and followed the NapoX ETH/BTC/USD Hourly strategy with a weight of 50% -this strategy can short/long Bitcoin and/or Ethereum- and the NapoX BTC Hourly 2 strategy also with a weight of 50%.

Assuming the first strategies is long BTC and ETH and the second one is long BTC, your first trades are long positions on both BTC and ETH, with the BTC position being an aggregate trade for both strategies. In other words, the bot will not open two positions for the same underlying because the strategies are long but will merge both trades into one target position instead in order to reduce trading fees and slippage levels.

If the signal is long for both BTC and ETH on your next trading window, then these positions remain the same although there may be a need of trade adjustment. However, if the signal for the NapoX BTC Hourly 2 strategy becomes short then on your next trading window, the BTC position will be readjusted depending on the weight of the strategy. In this case we have two scenarios : Either your BTC position will be evened out (i.e BTC exposition equals 0) or it will simply decrease in case the first strategy's weight is greater than the second's.

 

 

 

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