Portfolio Construction Memo
Date: January 14, 2026
Portfolio Universe: highwater, mt2x, persistent, tellurian, quantstrat, velox
Risk-Free Rate: 4.00%
Max Weight Constraint: 40.0%
CVaR Alpha: 5.0%
1. Executive Summary
Recommended Allocation: MinVar
| Metric | Value |
|---|
| Expected Return | 16.0% |
| Volatility | 1.4% |
| Sharpe Ratio | 8.31 |
| CVaR (95%) | -0.03% |
| Max Drawdown | -0.26% |
Rationale: The MinVar portfolio delivers the highest Sharpe ratio (8.31) among all optimization objectives while maintaining the lowest volatility (1.4%) and minimal tail risk. While EqualWeight offers higher absolute returns (23.9%), its volatility is 4x higher and drawdowns are 7x larger, making MinVar the optimal risk-adjusted choice for capital preservation with strong risk-adjusted returns.
Source: portfolio_performance.csv
2. Correlation Analysis
2.1 Correlation Matrix
| highwater | mt2x | persistent | tellurian | quantstrat | velox |
|---|
| highwater | 1.00 | 0.17 | -0.07 | 0.03 | 0.02 | 0.09 |
| mt2x | 0.17 | 1.00 | -0.01 | 0.21 | 0.01 | 0.04 |
| persistent | -0.07 | -0.01 | 1.00 | 0.05 | 0.10 | 0.05 |
| tellurian | 0.03 | 0.21 | 0.05 | 1.00 | -0.16 | 0.06 |
| quantstrat | 0.02 | 0.01 | 0.10 | -0.16 | 1.00 | -0.05 |
| velox | 0.09 | 0.04 | 0.05 | 0.06 | -0.05 | 1.00 |
Source: portfolio_correlation.csv
2.2 Diversification Assessment
| Metric | Value | Assessment |
|---|
| Max Correlation | 0.21 | Good - well below 0.5 threshold |
| Negative Correlations | 4 pairs | highwater/persistent, mt2x/persistent, tellurian/quantstrat, quantstrat/velox |
| Correlation > 0.5 | 0 pairs | None - excellent diversification |
Key Observations:
- All pairwise correlations are below 0.22, indicating exceptional diversification potential across the strategy universe
- Four strategy pairs exhibit negative correlations, providing natural hedging benefits during drawdown periods
- The mt2x/tellurian pair shows the highest correlation (0.21) but remains well within acceptable bounds
3. Optimization Results
3.1 Performance Comparison
| Portfolio | Exp. Return | Volatility | Sharpe | CVaR(95) | Max DD |
|---|
| EqualWeight | 23.9% | 6.0% | 3.34 | -0.31% | -1.82% |
| MaxSharpe | 20.3% | 2.0% | 8.21 | -0.05% | -0.46% |
| MinVar | 16.0% | 1.4% | 8.31 | -0.03% | -0.26% |
| RiskParity | 18.5% | 2.2% | 6.53 | -0.09% | -0.63% |
| CVaR | 15.1% | 1.4% | 8.01 | -0.03% | -0.29% |
Source: portfolio_performance.csv
3.2 Weight Allocations
| Strategy | EqualWeight | MaxSharpe | MinVar | RiskParity | CVaR |
|---|
| highwater | 16.7% | 8.3% | 2.9% | 8.4% | 0.7% |
| mt2x | 16.7% | 3.0% | 2.3% | 7.3% | 0.4% |
| persistent | 16.7% | 35.7% | 20.0% | 22.0% | 18.2% |
| tellurian | 16.7% | 1.2% | 0.6% | 3.6% | 0.7% |
| quantstrat | 16.7% | 11.8% | 36.0% | 29.8% | 40.0% |
| velox | 16.7% | 40.0% | 38.3% | 28.9% | 40.0% |
Source: portfolio_weights.csv
3.3 Analysis
- Return vs. Risk Trade-off: EqualWeight generates the highest absolute return (23.9%) but at 4x the volatility of optimized portfolios; optimization sacrifices 5-9% return for 3-4x risk reduction
- Sharpe Efficiency: MinVar, MaxSharpe, and CVaR all achieve Sharpe ratios above 8.0, dramatically outperforming EqualWeight (3.34) on a risk-adjusted basis
- Tail Risk: CVaR and MinVar portfolios deliver nearly identical tail risk profiles (CVaR ~0.03%), while EqualWeight's CVaR is 10x higher at -0.31%
- Weight Concentration: All optimizers favor velox (38-40%) and quantstrat (12-40%) as primary allocations, while reducing exposure to highwater, mt2x, and tellurian to single-digit weights
4. Risk Contribution Analysis
Note: portfolio_risk_contributions.csv not available; analysis uses portfolio weights as proxy for risk contribution assessment.
4.1 Recommended Portfolio Weights
| Strategy | Weight | Role |
|---|
| velox | 38.3% | Primary - return driver with low correlation |
| quantstrat | 36.0% | Primary - core volatility anchor |
| persistent | 20.0% | Secondary - diversification and alpha |
| highwater | 2.9% | Satellite - opportunistic allocation |
| mt2x | 2.3% | Satellite - minimal exposure |
| tellurian | 0.6% | Satellite - de minimis allocation |
4.2 Concentration Assessment
| Metric | Value |
|---|
| Top 1 Strategy Weight | 38.3% |
| Top 2 Strategies Combined | 74.3% |
| Strategies > 20% Weight | 2 |
| Strategies < 5% Weight | 3 |
4.3 EqualWeight vs Optimized Comparison
| Metric | EqualWeight | Recommended | Improvement |
|---|
| Volatility | 6.0% | 1.4% | -76% |
| Sharpe Ratio | 3.34 | 8.31 | +149% |
| Max Drawdown | -1.82% | -0.26% | -86% |
5. Implementation Considerations
5.1 Rebalancing
| Frequency | Recommendation |
|---|
| Calendar-based | Monthly |
| Drift trigger | 5% absolute |
5.2 Transaction Costs
| Factor | Estimate |
|---|
| Expected monthly turnover | 3-5% |
| Slippage assumption | 5 bps |
| Annual cost impact | 15-25 bps |
5.3 Liquidity & Sizing
| Account Size | Implementation Notes |
|---|
| < $1M | Full implementation feasible; single-lot allocations may round satellite positions to zero |
| $1M - $10M | Standard implementation; consider minimum position sizes of 1% to reduce rebalancing friction |
| > $10M | Capacity assessment required for quantstrat and velox; stagger entries to minimize market impact |
6. Governance & Limits
6.1 Position Limits
| Strategy | Target | Min | Max |
|---|
| velox | 38.3% | 25% | 40% |
| quantstrat | 36.0% | 25% | 40% |
| persistent | 20.0% | 10% | 30% |
| highwater | 2.9% | 0% | 10% |
| mt2x | 2.3% | 0% | 10% |
| tellurian | 0.6% | 0% | 5% |
6.2 Drawdown Triggers
| Level | Threshold | Action |
|---|
| Watch | -0.5% | Increase monitoring frequency to daily |
| Alert | -1.0% | Review strategy-level attribution; prepare rebalance |
| Action | -2.0% | Reduce gross exposure by 25%; halt new positions |
| Stop | -3.0% | Reduce to 50% target weights; escalate to Investment Committee |
6.3 Rebalancing Triggers
| Trigger | Threshold | Action |
|---|
| Calendar | Monthly | Rebalance to targets |
| Single position drift | >5% | Partial rebalance affected position |
| Aggregate drift | >10% | Full rebalance all positions |
7. Recommendation
7.1 Final Allocation
| Strategy | Weight |
|---|
| velox | 38.3% |
| quantstrat | 36.0% |
| persistent | 20.0% |
| highwater | 2.9% |
| mt2x | 2.3% |
| tellurian | 0.6% |
| Total | 100.0% |
7.2 Conditions for Implementation
- Verify live trading capacity in velox and quantstrat for combined 74% allocation at target AUM
- Confirm execution infrastructure supports monthly rebalancing with drift-based triggers
- Establish real-time monitoring for drawdown thresholds with automated alerting at -0.5% portfolio level
7.3 Key Risks to Monitor
| Risk | Indicator | Mitigation |
|---|
| Concentration in velox/quantstrat | Combined weight exceeds 80% | Hard cap at 80% combined; redistribute to persistent |
| Correlation regime shift | Rolling 60-day correlations exceed 0.4 | Reduce exposure to affected pair; increase cash buffer |
| Strategy capacity breach | Slippage exceeds 10 bps on rebalances | Scale down position sizes; extend execution window |
| Tail risk underestimation | Realized CVaR exceeds modeled by 2x | Increase cash allocation to 10%; reduce leverage if applicable |
Data Sources:
/Users/syntax/projects/finance/allocator_analysis/reports/no_syntax_portfolio/portfolio_weights.csv/Users/syntax/projects/finance/allocator_analysis/reports/no_syntax_portfolio/portfolio_performance.csv/Users/syntax/projects/finance/allocator_analysis/reports/no_syntax_portfolio/portfolio_correlation.csv