Risk of ruin

Mat001 · Post by **Mat001** » Mon Feb 23, 2015 2:41 pm

Is the risk of ruin a function of win rate in the sense that the higher the win rate the lower the risk of ruin? This this argued in this blog. Any academic papers about risk of ruin you can suggest, other than Thorp's book?

gergely · Post by **gergely** » Sun Mar 01, 2015 12:44 pm

Not sure if this answers your question because one never goes broke with this, but you might want to google:

Ziemba, fractional Kelly betting

and look at the papers.

Mat001 · Post by **Mat001** » Sun Mar 01, 2015 3:24 pm

Thanks, I'll take a look. I understand why fractional Kelly cannot reduce equity to 0 but if someone loses 75% it is like going broke. In trading floors if one loses something like 40% they consider him a broke trader and give him the boot.

goldorak · Post by **goldorak** » Sun Mar 01, 2015 3:55 pm

> if someone loses 75% it is like going broke

May I suggest you avoid trading all together?

afekz · Post by **afekz** » Mon Mar 02, 2015 11:41 am

[Edited to provide better context]

Mat001 wrote: "I understand why fractional Kelly cannot reduce equity to 0 but if someone loses 75% it is like going broke. In trading floors if one loses something like 40% they consider him a broke trader and give him the boot."

If you want to stay in the game and have some externally imposed maximum drawdown requirement, e.g. 20%, then stick 80% of your capital in treasuries and bet (fractional) Kelly on the balance.

This of course assumes you can generate enough return on that 20% to justify your existence while you grow your capital base...

Mat001 · Post by **Mat001** » Sat Mar 07, 2015 1:12 pm

@goldorak,

"May I suggest you avoid trading all together?"

Probably you are talking as a speculator but a professional cannot withstand such a loss. Do you know of any fund that survived after a 75% drop? Some funds were liquidated in past years after losing only 20%. I think only clueless traders use Kelly betting. There is a difference between theory and practical trading. If you want to talk theory we can do that but it won't help anyone to profit.With all respect due.

goldorak · Post by **goldorak** » Sat Mar 07, 2015 7:40 pm

I think @afekz summarized it all for you.

The term "professional" makes no sense in finance. The mainstream approach in investment management is just a joke from day 1. A management fee collection machine, that is all there is about it.

There is no reason why a fund with a 75% drawdown can be any worse than a fund with a 2% drawdown. If you know of any, please let me know.

That actually reminds me of this piece I stumbled upon the other day.

100% return fund

The new program, which returned

29.87% in February, according to Covenant,

is expected to hit 35% drawdowns

each calendar year, with a worst drawdown

of 50% to 75% every seven-year

period

And btw, I love the terminology "speculator" vs "professional". Do you watch CNBC by any chance? Because professionals do. And they wear ties too.