BUG Strategy – Allocations do not add up to 100%. Is this correct?

BUG Strategy – Allocations do not add up to 100%. Is this correct?2017-03-03T15:27:01+00:00
  • Author
  • Vangelis
    Post count: 156

    For the non-leveraged version of the BUG, allocations may often add up to less than 100%.
    If, for example, allocations add up to 90%, then the rest 10% stays in cash.

    Why does this happen?
    The BUG strategies have a volatility limiting mechanism. If an asset exhibits volatility beyond a certain threshold (for example SPY during the 2008 crisis) the algorithm limits exposure to that asset. The logic is that one asset should not contribute to more than x% of risk to the total portfolio. That results in exposure of less than 100%. That is desirable since we should be less invested in very volatility times.

    For The leveraged version, the allocations often add up to more than 100%. That just means that if you are running a $100,000 account, and allocations add to 135%, then you need to leverage (borrow) 35% of the account. Up to 2x leverage is standard in U.S. based brokers.

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