Ralph Vince 2009 Leverage Space ...

I read Ralph Vince’s new book, The Leverage Space Trading Model, this evening. It was released very recently on May 26th ’09. Previously I read one of his older books, The Handbook of Portfolio Mathematics. Vince writes about money management, i.e. position sizing, which tries to answer the question, “How much of my capital should I bet on any given trade in order to maximize my wealth over time”.

This one is much shorter at under 200 pages which is definitely an advantage over the previous. Overall, it’s an interesting read, but with big issues:

Vince seems to be living in an insulated world. He apparently hasn’t followed recent advances is portfolio optimization, and he is calls Monte Carlo extremely difficult. He is extremely critical of things he shows only a basic understanding of.

For example one of the major justifications he claims for his “new” theory is that mean-variance portfolio optimization (“modern portfolio theory”) doesn’t consider leverage. But in fact MVAR optimization is equivalent to Kelly criterion betting. In all his examples of MVAR he forgets the risk free asset, which allows for leverage to come into the optimization. Furthermore, Monte Carlo simulation …

This one is much shorter at under 200 pages which is definitely an advantage over the previous. Overall, it’s an interesting read, but with big issues:

He seems to have a tendency to become obsessed with one or two little problems of the mainstream/popular approaches to money management and now he lashes out against them, overdoing the nonconformity. He creates his own notation, metaphors, names for theories (he may simply not be aware of similar work), and as I mentioned above, he doesn’t really understand all the things he lashes out against. Overall it comes across sounding a little bit immature. Academic publishing is a long discourse, not a contest. Also, he sounds like he has a thesaurus on hand while he writes.

The last chapter is simply ridiculous. Basically he recommends that everyone should bet according to the scheme outlined in the St. Petersburg Paradox (Wikipedia). As I was reading it I kept thinking he would say it was a joke or just an idea to think about. But he’s really saying that banks, individuals, and funds should go out and use this strategy, because supposedly humans only care about being profitable with the highest probability (he gives a couple of loose justifications from cherry-picked psychology/econ utility theory works). Essentially he’s saying everyone should follow LTCM‘s strategy.

At the same time, if you can look past these issues, Vince has new ideas. The first few chapters will definitely expand your understanding of position sizing. I’m disappointed that Vince’s creativity couldn’t have illuminated more fruitful paths.

One thing I was thinking he may go into when I read the title of Chapter 6 “A Framework to Satisfy Both Economic Theory and Portfolio Managers” is applying optimal ‘betting’ to everyday non-financial choices. Any choice with an unknown outcome can be considered a bet, but some result non-monetary gains, and maybe he could have analyzed these similarly.

Overall, I was diappointed that he didn’t do more, but happy with the ideas I was able to selectively extract.