How I Structure My Portfolio (Risk Premia/ Active Strategies/Alpha) - With Examples
High level overview of how I run my vast portfolio (low 5 figures)
Hello my dear reader,
Thank you for reading the second memo regarding portfolio construction. I thought this would be a good place to start.
I know this sounds like a dry topic so I plan on keeping it engaging by providing examples on each component.
Before I go any further I must say I am (generally) a delta neutral trader. I (generally) do not have directional exposure.
This is important to highlight as if you are a swing trader this article may not be for you.
However, I will give an example on how a directional trader could incorporate this mental model into their portfolio.
In the future I plan to write an article on how I see markets and why I trade with little directional risk.
Leave a comment if you would like me to make that post next.
High Level Overview
At a high level I break my portfolio up into 3 components:
Risk premia strategies
Active strategies
Alpha strategies
They are not equally weighted as risk premia strategies are relatively easy to find whereas alpha strategies are obviously harder to find.
The Larp Capital Portfolio Approach
Risk Premia
Risk premia strategies are (generally) easy to find. These are strategies that are low effort and tick over every day. They help pay the bills but (probably) won’t make you rich.
You should be able to estimate how much the strategy will make every week/month/year.
I usually try to have a few of these tied together.
Delta Neutral Example
A risk premia strategy that I was running for a while was staking ATOM and shorting the perps.
The first leg of the trade was staking ATOM (the coin) to validators which was paying roughly 20%, if I remember correctly.
The second leg was to short ATOM perpetual contracts at Bybit/Binance/{placeholder_exchange}.
At the time you would make roughly 10% shorting the perps, meaning the funding was positive so you got paid to go short.
There were risks:
Liquidation risk at the exchange if ATOM were to pump and you couldn’t get money there quickly enough
Ledger/hot wallet risk
General rug risk (it is ever present in crypto lol)
Author note: I just checked on this trade and it seems the perps now have negative funding, meaning it now costs you to go short.
So the trade is over. Maybe look around at coins that have low double digit staking rewards and the funding is consistently positive.
Directional Examples
Directional risk premia trades are easier to find.
At a minimum you could just long the stock market as it (generally) returns 7% a year, or shorting volatility which is (generally) overpriced. Not financial advice obviously.
The problem with doing it directionally is when everything goes falls apart there are usually great trades but you will be down from the jump.
In that environment you want to be coming in fresh and taking advantage of all the opportunities.
If you have 30% of your portfolio in the S&P which is down 20% you are down 6% going into the event.
Maybe 6% is palatable for you but just something to consider.
Other Examples
Another example of non directional would be to crypto cash and carry/funding trades that just tick over every day.
It has been a while since I done this style of trading so I am not sure how good they would be as of writing.
HOWEVER, when the market gets bullish these funding rates blow out. I remember in March 2024 DOGE was paying like 100% to short the perp. Good trade.
Active Strategies
Most active strategies are trades that you do (relatively) frequently. Usually you are sitting at the desk waiting for them or have alerts set up.
I see active strategies a little bit differently. Ideally you want to take something that works in tradfi and do it in a less efficient market.
Example 1
A little while ago I found a broker that allowed you go to long/short stocks in a market that was relatively hard to trade in. Think bottom of the list G20 countries.
I made a Tradingview chart with a z score and and bollinger bands and basically just pairs traded closely related companies.
You wouldn’t want to do this with technology companies but good candidates are generally REITs, utility companies and other mature businesses.
Because it was difficult for traders to buy stocks in this country let alone short them it was a decent trade.
Example 2
Another example is when long time friend of the show Liquidity Goblin was pairs trading two closely related coins that had similar projects on chain.
An astute reader has probably read the sentence above and immediately thought “How can you pairs trade on chain? A pairs trade involves a long AND a short, you can’t go short on chain.”
Liquidity Goblin found a protocol that let you borrow both of the closely related coins.
Because he was able to borrow the coin he could sell it (on chain) and bang it back into line.
This had edge because it was size constrained and it was outside of the box thinking by using a protocol to borrow the coins then sell them to go short.
This trade worked really well for a while. This was a few years ago, I asked for his permission before publishing this which he generously granted.
If you harass him enough on Twitter he might make a thread about it.
Alpha Strategies - WITH AN EXAMPLE
Alpha strategies are the dream of any trader.
There is a famous interview with Euan Sinclair where he defines alpha strategies vs risk premia.
“The old joke is there can’t be money on the street because someone would have picked it up, but traders know that isn’t true.
So we will occasionally see money on the street, if you see the money on the street and you always see it on Sunday morning outside of a bar, that is an inefficiency.
Because what has happened is someone has walked out of the bar the night before, they were reaching into their pocket to get their phone, they dropped the money and they didn’t notice it.
So that is why that money is there, it is an inefficiency. It shouldn’t be there because someone else made a mistake and you were the first one to pick it up.
If you see that money in the middle of a highway that is a risk premium, others have seen it it but decided that they weren’t going to go and pick it up.” Emphasis added.
An alpha strategy might be you observe every Friday before the close someone buys 2x the average volume on some microcap stock.
To borrow a quote from Justice Potter Stewart “I don’t know how to describe it but I know it when I see it.”
It is kind of like that with alpha.
If someone messages me saying they have a good strategy it is easy to discern whether it is an alpha trade or not.
If you ask nicely in the comments I might do a post on alpha trades I have done.
Example
Every country has numerous crypto exchanges catering to people who want to go from fiat to crypto.
This presents a great opportunity for setting ‘stink’ bids >1% higher/lower on {fiat}/usdt pairs.
Below is an example on an Australian exchange.
Note the volume and the huge wicks.
What is happening is someone is putting through a market order and ‘demanding liquidity’ which causes their order to blast through the orderbook.
You would be shocked at how often these trades are available in country specific crypto exchanges.
You probably won’t have any luck finding them on Binance but your lower tier exchanges in your country could be profitable.
I ran this strategy for all of 2023 on a few exchanges. Every morning I would put bids/offers into the book a few percent away. You would be surprised at how often I was filled.
This was just after FTX, so I have to wonder if these trades were only available because people were afraid to have their money on exchanges?
But from just looking around at a few places I used to do it, the trade looks alive and well.
This brings an end to this posts. I hope you have enjoyed.
This is the second post I have done so I am sorry if the writing is a bit clunky. I am trying to get better.
If you have any questions or anything to add please comment.
Feedback is always appreciated.
Your friend always - Worst Contrarian
Really enjoying these, and learning a lot already. Would love a post someday on - learning resources (books/articles/habits,etc) you've found helped you most in your trading journey. Aside from that, thanks for putting these out!
Good stuff, thanks for putting aside some of your yacthing time to write these