Portfolio Structure
A2PB portfolios are structured in a hierarchical fashion. The following levels are supported (with increasing granularity):
Account
At the top is the account. It is the highest level object of the portfolio structure. An account instance can be created to connect to an existing Interactive Brokers trading account. Alternatively, other types of account objects can be created with the goal to simply track a specific type of value that you enter and update manually (like, for example, the value of a pension fund that you will track alongside your other A2PB account objects). The value held in all of your accounts is shown in A2PB in an area called dashboard.
Portfolio Group
A Portfolio Group is, as the name implies, a group of portfolios. Portfolio groups can be used to structure your portfolios (i.e. group related portfolios under a common portfolio group). The total target exposure value of a portfolio group is expressed as a fixed percentage of the total value of its account. An account can have one or more portfolio groups.
Portfolio
Portfolios are created as sub-elements of portfolio groups. Portfolios are the containers in which you manage your securities of interest (whether you actually own them or whether you’re keeping track of them as potential future investments). The target weight (exposure) of a portfolio is expressed in qualitative terms and resolved proportionally among the sibling portfolios within a portfolio group. Portfolios are of central importance in A2PB and expose some particular features that are described in the next section.
The A2PB Portfolio
In A2PB, a portfolio is a container for a number of securities of your choice. An A2PB portfolio is sub-divided into three sub-containers called “pools”. The pools are named as follows:
Positions – contains the securities that you’re currently holding (either long or short).
Candidates – contains securities that you don’t currently hold but which are of special interest and may become positions in the future. This pool also receives the positions you close out of the positions pool.
Watchlist – contains securities that you want to keep an eye on in the context of the portfolio. Entries in the watchlist typically don’t have the same potential as the securities in the Candidates pool. Securities can easily be moved from the pool of candidates to the watchlist and vice-versa.
When setting up a portfolio structure in A2PB it is best practice to keep portfolios small and specialized. Consider structuring your portfolios according to the following criteria:
- Keep securities of similar type in a portfolio
- Don’t mix securities with different currencies in one portfolio
- Look for other types of specializations, like industry, capitalization (e.g. “blue-chip, small-cap”), growth vs. value, etc., and specialize your portfolios based on these categories.
Above suggestions are not mandatory but they make portfolio balancing more powerful as it allows you to re-balance whole portfolios relative to each other based on these criteria.
The following illustration shows an example portfolio that currently holds 3 positions (center left chart column), one candidate (center column) and one watchlist entry (right-hand column).
Monitors
As a technical detail: the “children” of a portfolio are not made up of securities directly but rather of so called monitors. A monitor is basically a wrapper and graphical panel for a security. When you’re adding a security to a portfolio, you’re always adding a monitor to the portfolio which refers to the security of interest.
You can have different portfolios in your portfolio structure that contain monitors referring to the same contract. Monitors referring to the same underlying security can have differing balancing parameters in the context of their enclosing portfolio (like for example a different target weight).
Qualitative Input
In A2PB, you will never input a concrete number of shares to buy for a particular security. When managing your investments in A2PB, all you do is review trade order suggestions proposed to you by the system and either accept them for execution or reject them. However, A2PB doesn’t create trade order suggestions out of the blue sky but rather based on a particular kind of input you provide for the various objects that make up your desired portfolio/investment structure. Your input to the system – the set of parameters that allow A2PB to create trade order suggestions – are called balancing parameters.
Balancing parameters are (with few exceptions) of a qualitative nature. Meaning: you don’t tell the system to buy, for example, $ 20’000 worth of a particular security, but rather tell the system that you’d like to own a small value of security, say, A, relative to some other security, B, of which you’d like to own a bigger value. Such relative qualities (e.g. the meaning of small versus big) are resolved by A2PB by looking at the context they are expressed in. For example the weight of securities relative to each other within their enclosing portfolio, or the relative weight of portfolios relative to each other within their common portfolio group.
Apart from a security’s (target) weight, there’s also the security’s rating. The rating is a key parameter considered by A2PB when creating trade order suggestions. The qualitative rating system used in A2PB is modeled after the system commonly used by analysts using terms like “strong buy”, “sell”, “hold”, etc. The following section explains the two balancing parameters “rating” and “weight” in more detail.
Security Rating and Weight
Rating
Monitors (the securities they represent in the context of their portfolio) are rated according to the following table:
| A2PB Rating | A2PB Meaning | Common Meaning |
|---|---|---|
| Strong buy | Strong buy (manual buy override) | Strong buy |
| Buy | Buy (buy suggestion to the algorithm) | Buy |
| Buy/adjust | Buy/adjust (suggestion to the algorithm) | Outperform, overweight, moderate buy, accumulate |
| Hold | Hold | Hold |
| Sell/adjust | Sell/adjust (suggestion to the algorithm) | Underperform, underweight, moderate sell, weak hold |
| Sell | Sell (sell suggestion to the algorithm) | Sell |
| Strong sell | Strong sell (manual sell override) | Strong sell |
Weight
The second most important parameter for a monitor/security next to its rating is the intended target weight for a portfolio position. A simple three level system was chosen to express the target weight (exposure) of an investment. The three levels are: small, medium and large. If needed, a further sub-division is possible by providing a so called weight hint of plus or minus. This results in the 9 distinct possible degrees of weight as depicted in the table below:
| Weight class | Weight Hint | Weight with Hint | Numeric value |
|---|---|---|---|
| Large | + | Large + | 9 |
| Large | no hint | Large | 8 |
| Large | – | Large – | 7 |
| Medium | + | Medium + | 6 |
| Medium | no hint | Medium | 5 |
| Medium | – | Medium – | 4 |
| Small | + | Small + | 3 |
| Small | no hint | Small | 2 |
| Small | – | Small – | 1 |
This weighting system is not only used to weigh the target exposure of portfolio positions relative to each other but also to set the desired target exposure of whole portfolios in the context of their common portfolio group.
Overview of Balancing Parameters
The two central balancing parameters, rating and weight, were introduced in the previous section. When configuring a portfolio structure in A2PB, a few more parameters are required for you to provide. In fact, each particular kind of object in A2PB has its own set of associated balancing parameters that it supports. The balancing parameters supported on the various levels of an A2PB portfolio structure are as follows:
On the Account
The total cash available for trading is provided on the level of the account. However, this value is not set as a parameter but rather received from the broker account the account object is associated with.
On the Portfolio Group
Exposure % – the single balancing parameter that can be set on a portfolio group is called “Exposure %”. It defines the target exposure value in account currency for the portfolio group. For example: given an account with a total value available for trading of $ 500’000 and a single portfolio group in the account with an exposure % value of 20%, the target exposure for the portfolio group will be $100’000.
On the Portfolio
Target Size – the expected number of positions in the portfolio (degree of diversification).
Weight class – the portfolio’s weight class. See section “Weight”, above.
Weight hint – the portfolio’s weight hint
Suppose you have 2 portfolios in a portfolio group. Both portfolios have a weight of medium. As a result, both portfolios will receive an even share of the available target exposure value of their parent portfolio group, i.e., in our previous example, each will have a target exposure value of $50’000. The value share is always calculated proportionally to the weight that’s set on a portfolio.
For the calculation, the weight’s numeric value is used (see table, above). Given a portfolio with weight small (value = 2) that’s next to a portfolio with weight large (value = 8), the smaller portfolio will receive the fraction of 2 / (8 + 2) of the total available investment money in the portfolio group, while the large portfolio will receive 8 / (8 + 2) of the value.
Hedging % – the target hedging value expressed as a percentage of the portfolio’s total target value. This is the target total value of all hedge positions in the portfolio. Hedge positions in a portfolio are positions whose value is expected to move counter to the bulk of the portfolio’s value. See also parameter Is hedge, below.
On the Monitor
Rating – the rating of the security associated with the monitor. See section “Rating”, above.
Weight class – the security’s weight class. See section “Weight”, above.
Weight hint – the security’s weight hint
Is hedge – this parameter allows the user to determine whether a security, if held, is considered a hedge within its enclosing portfolio (relative to the rest of the positions).
Actual vs Target Exposure
In A2PB, the most important metric for an investment (next to the investment’s P&L, i.e. profit and loss value), is the investment’s current exposure relative to its intended target exposure. These values are graphically presented by means of a special type of bar chart. The following example shows the exposure diagram for a portfolio with 3 positions. Each bar visualizes two values: the current exposure (dark blue squares) and the intended target exposure (green or red markers).
For UBSG, the two values fall on the same tile (the same value range). As a result, a green marker is used to express the matching actual vs. target exposure.
In the case of CSGN, the actual exposure is valued at one tile, while the intended target exposure is set to two tiles.
In the case of NOVN, we have an over-exposure by one tile.
The gray areas in the diagram represent the target weight class of the investment. Consequently, in this example, the three investments have target weight medium (center of 2nd class area), small and small.
Instructions
Another important aspect of A2PB is the concept called Instructions. Instructions are user interactions. Every relevant action you take in the application is recorded as an Instruction and listed in the Instruction Log. This serves two main purposes:
Reproducibility – you get a complete audit log of all of your interactions with the system, including all of the parameter values that were provided at the time.
Scripted execution – Instructions can be exported in text form. Exported instructions can be compiled to scripts and executed. This provides an easy way to create test scripts that can be created out of the application. These scripts can be edited in a simple text editor and then put into a dedicated directory where they become part of the application’s automated test suite.
Key Terms
| Account | Typically the online broker account A2PB is connected to. Currently, only Interactive Brokers‘ accounts are supported for live trading. Non broker account objects can be created in A2PB to track personal assets like cash held in a bank account or the value of a pension fund. |
| Agile | The ability to balance/re-balance your portfolio and to react to changes in the market in a very quick, easy and safe manner (safe in terms of minimization of errors when calculating order positions, limits, etc.). |
| Balancing | Buying and selling securities in order to reach the target exposure of positions (and portfolios) as defined by the target weight set for the positions (and portfolios) respectively. |
| Balancing parameter | A parameter that is set on a portfolio group, portfolio or monitor and used by the A2PB balancing algorithm to calculate trade order suggestions. |
| Brick diagram | A type of histogram used to visualize the exposure of positions in a portfolio or the exposure of portfolios within a portfolio group. |
| Candidate | A security that may become a position. |
| Candidates pool | The pool of candidates in a portfolio. These are securities of interest that you don’t currently hold as positions but are of special interest and may become positions in the future. |
| Exposure | The value of a security held (or of a whole portfolio). This value is subject to changes in market price. For long positions, the exposure of a position is equal to its value. For short positions, the value is the same after changing the sign (e.g. a short position with value $ -10’000 is considered as having an exposure of +10’000). See also target exposure. |
| Frozen position | A position that is not subjected to automatic trading/re-balancing. You can mark positions simply by checking the frozen property in the security’s balancing dialog box. |
| Hedge % | The target percentage of a portfolio’s value that’s allocated for hedging. |
| Hedge position | A position in a portfolio that is expected to run counter-cyclical to the bulk of the positions in the portfolio. |
| Holding | See position |
| Monitor | A general term referring to an element of a portfolio pool (see pool). A monitor always refers to a tradable security and displays current market data and other information for the security. See security. |
| Pool | A sub-set of a portfolio. A portfolio has the pools positions, candidates and watchlist. A security that’s part of a portfolio is associated with exactly one pool at any given time. |
| Portfolio | A range of investments held. In A2PB a portfolio typically has a specific scope and tends to contain few positions. Diversification is achieved by having multiple positions in a portfolio but equally important by having multiple portfolios in an account. |
| Portfolio group | A container holding a number of portfolios within an account. |
| Portfolio position | See position |
| Position | A concrete number of a particular type of security held in a portfolio (in the positions pool). |
| Positions pool | Contains the set of securities that you currently hold as positions in a portfolio. |
| PRW Engine | A picking, rating and weighting engine – logic that operates on an A2PB portfolio to pick securities (add them to the portfolio) and then continuously generate rating and weight class adjustment instructions on it. |
| Rating | The rating of a monitor/security as described section “Security Rating and Weighting”, above. |
| Security | A specific security contract like a stock or an option that is tradable by the A2PB system (i.e. that is associated with a specific security contract from the broker and for which buy and sell orders can be submitted). See also monitor. |
| Target exposure | The calculated target exposure value for a portfolio group, portfolio or security. See also exposure. |
| Target weight | The weight class (and optional weight hint) of a portfolio or security. |
| Trade order suggestion | A proposed trade order generated by A2PB in order to reach a security’s or portfolio’s target exposure (and other balancing parameters). Users can opt to reject trade order suggestions or to execute them. |
| Watchlist pool | A pool of securities within a portfolio that you want to keep an eye on but that don’t have the same potential as the securities in the candidates pool. |
| Weight | See target weight |
| Weight hint | A hint of plus, minus (or neutral) associated with the target weight of a security. This allows for finer-grained weighting of securities than what is possible by the three weight classes small, medium and large. |