Hi Quantopians,
We're adding another template to our algorithm building blocks: Constant Proportion Portfolio Insurance (CPPI). A very simple concept, yet very effective at preventing drawdown below a fixed threshold. Ernest Chang is a fan, too.
For demonstration I've combined it with volatility selling - arguably one of the riskier strategies out there. The implementation here is bare-bones and simply buys the inverse short-term volatility ETN XIV. It re-balances weekly and transfers gains from the XIV position to the cash position. The inverse, moving from cash back to the position, is not allowed.
The algo plots the current leverage and you can see CPPI in action during winter 2014/15, where the XIV position shrinks dynamically and then slowly grows back to the high-water mark. Since CPPI is set to a 0.50 threshold, the maximum drawdown cannot surpass 50 percent. Of course, this margin of safety comes with a performance trade-off that is typically addressed by taking risky positions (e.g. short-volatility) or leveraging.
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Previous quantapolis.com templates:
* SPY constant volatility w/ dynamic leverage
* Value Example (long-short)
