Asymmetry: cut the left tail, keep the right

An asymmetric bet is one where you can win much more than you can lose. Venture capital is the classic example: most investments fail, a few return 10 or 100 times, and those few pay for everything.

Asymmetry in a portfolio

You can create asymmetry in two ways:

• Position size — if each position is small, the most you can lose on it is small, while a winner can grow many times over.
• Rules that cut losses and let winners run — stepping out of a market in a persistent downtrend limits the downside; staying in while the trend is up keeps the upside open.

What it looks like

Here is every month of the S&P 500 since 1993, sorted by return — buy & hold versus a trend-following rule:

The right side of both distributions — the good months — looks similar. The difference is on the left: the rule has far fewer deep losing months. In our data, the worst single month for buy & hold was around −20%; for the rule, about half that. More months near zero (when the rule is in cash) is the price for a thinner left tail.

Related: volatility · max drawdown

By Dr. Harry Hamann · 4 min read