Rebalancing and Risk Management:

• The strategies are rebalanced at close, e.g. typically using TAS or MOC orders.
• Asset level risk management framework will exit an active allocation in the case of,
  • The allocation reach a pre-defined performance target (TR).
  • The allocation hit a pre-defined performance stoploss (SL).
  • An opposing allocation opportunity arises (OA).
  • The allocation reaches its pre-defined holding period (HP).
• For an exit criteria that is met at day T, the exit instruction will typically be executed at close on the day T+1.

Question:

• What is the performance impact from the delay between meeting the exit criteria and its execution?
• The question is addressed in the context of exit initiated by hitting a stoploss or target, since they are triggered by profits and losses.

For all portfolio asset allocations:

• Identify allocations exceeding SL threshold before exit, i.e. without meeting other exit criteria before SL.
• Calculate allocation return based on low (high) price for long (short) allocations with respect to close at entry, to be compared with SL threshold.
• For the SL allocations, record additional return due to later exit time.

Three late exit return differences:

• SL – Close(T): ∆return from SL and close on day T.
• SL – Open(T+1): ∆return from SL and open on day T+1.
• SL – Close(T+1): ∆return from SL and close on day T+1.

A positive return difference therefore corresponds to SL loose less than if exiting later.

Results Observed:

• Indicate slightly positive mean.
• Mean decrease with later exit time, e.g. close(T) vs close(T+1), could indicate a tendency of reversion the day after.
• Practically small effect, e.g. “interpretation”
  • SL – Close(T): "6 days +1.7% vs 7 days -1.7% "
  • SL – Open(T+1): " 15 days +1.8% vs 16 days -1.8% "
  • SL – Close(T+1): " 25 days +2.5% vs 26 days -2.5% "

In average, results suggest that exit at close on T+1 is as good or slightly beneficial with respect to earlier exit options, e.g. due to reversion tendency.

Results Observed:

• Same analysis, however, for exit due to hitting target threshold show opposite tendency.
• Indicate slight negative mean of distributions.
• Mean decrease with later exit time, e.g. close(T) vs close(T+1), could indicate a momentum tendency the day after.
• Breakdown per commodity indicate that a majority of the commodities contribute with a negative mean.
• Target thresholds typically larger than those for stoploss, resulting in lower (larger) analysis statistics (errors).
• Negative return difference corresponds to TR profit less than if exiting later.

In average, results suggest that exit at close on T+1 is as good or slightly beneficial with respect to earlier exit options, e.g. due to momentum tendency.

Results Observed:

• Result compared between three different portfolios, i.e. P1 to P3.
• Two different commodity portfolios and one equity index portfolio.
• Comparing returns from Close(T) to Close(T+1) show a consistent pattern between portfolios.
• All in support of results observed above.

In average, results suggest that exit at close on T+1 is as good or slightly beneficial with respect to earlier exit options, both when exit triggered by a stoploss as well as a target.