I am hoping that a few of you have already worked this out… (it seems that the latest Bestoga smart alpha model from Georg uses the same principle)
I started last week a live “long-short” portfolio which is long stocks and constantly shorts IWM @ 80% of current holdings (hedge module always “true”).
Shorting IWM imposes the use of margin in the setup.
I am finding it difficult to understand the quick stats I am seeing and reconciliating them back to what I see on my IB reports (see the attached picture)
How is the $223,990 cash calculated? The $244,173 market value?
If I close all my positions (assuming no price change) → is the value of my port $244,173?
I can see (see picture) that all the differences match each other
That led me to trying to understand the margin / leverage feature - which I never looked at before. I can’t find anything in the help section or on the forum
Say you create a long-short port / sim with starting value of $100k ; min maintenance margin = 50% (implied leverage = 2) ; constant short ETF IWM @ 80% of current holdings (via hedge module always true)
What is the P123 logic going to try to do? Build a port of {$100k x 2= $200k} value with Long + (80% x Long) = $200k → Long positions = $111k and short IWM for $89?
oddly, when I try that on a sim and check positions the next day after creating the simulation, I am getting long positions of c$99k and short IWM for $78k. I can see the ratio 80% of current holdings is respected but why would the total be c$177k instead of $200k?
Finally, to be able to implement this long-short approach at IB I had to move from “RegTmargin” to “Portfolio margin” as I could not even place all my trades under the RegTmargin (not enough margin!)
I assume the portfolio margin configuration takes into account the fact that long risk + short risk offset each other whereas “RegTmargin” kind of sums up the absolute value of all risk without relating them to each other
“Min Maintenance Margin” - This is the margin requirement of holding a position before you get a margin call. For Reg-T it will be 50% on any marginable stock. Therefore the maximum implied leverage that could be used with reg-t is 2x. For portfolio margin they use a fancy complicated formula to calculate the required margin, but for most large caps it will be in the area of 15%-20%. So with portfolio margin the maxmimum possible leverage ratio could be >6x. But this IS NOT where to input your desired leverage ratio, which is a point where you’re confused.
“Leverage (Excluding Hedge)” - THIS setting is the desired leverage ratio. So in your screenshot it is set to 1. This means if given $100K it will buy $100K of long stock. If you have a hedge set to short IWM for 80% of holdings then it will THEN enter that position for $80K, giving you an overall leverage ratio of 1.8. If it were set to 50% of current holdings it would hedge $50K and you would have a leverage ratio o 1.5. If you want a leverage ratio around 2 with an 80% hedge then you would want to set this value around 1.11, then it would buy $111K long and short $89K.
About the IB reporting:
Cash calculation can be confusing when you have short positions. Entering a short position results in the cash proceeds coming IN to your account. So for example if you deposit $100K, buy $50K long and short $50K of IWM you would have $100K CASH still in your account. The account starts with $100K, minus $50K to buy long stocks, then plus $50K proceeds from short selling. Thus we still have $100K in cash at the end. But we now have a margin requirement, meaning we can’t withdraw all $100K. The amount of cash you have in your account IN EXCESS of your margin requirement will be called “excess liquidity”.
Total market value (incl. cash) - I’m not familiar with this line, but it appears to me to be ($ long) - ($ short) + (cash). It IS NOT the value of the account. I’m not sure what it is really.
Net liquidation value - This is the value of the account. This is the “if I closed all positions right now at market price how much would I cash out with” answer.
SUpirate - thank you very much - this is probably the best explanation ever both for P123 and for the IB side.
It would be useful if someone from P123 could chip in and clarify:
In the context of a port with long positions + short (=hedge) → what does ‘cash’ and ‘Total Market Value (inc. Cash)’ mean and how is one of them calculated (once we have one we can calculate the other with the relationship indicated above)
Jerome,
If you download the performance listing into excel you will find the historic daily values of all three: Long MktVal, Cash, and Hedge MktVal. These values are derived from the transaction ledger “All Transactions”.