A Defense Trading Strategy That Works — Constant Proportion Portfolio Insurance (CPPI)
We’ve been talking too much about the attack side of quantitative trading, such as momentum, mean reversion, and ML. These strategies aim to outperform the benchmark/index by adding your personal points of view to the trading strategies. Beating the benchmark becomes the only goal when playing the offense. What about defense? After reading Introduction to CPPI — Constant Proportion Portfolio Insurance, I realized that I couldn’t agree more with Sun Tzu, a Chinese military leader, strategist, and philosopher, who famously remarked, “The best defense is a good offense.” What does the term “defense” mean in the context of quantitative trading? Is defense synonymous with trying not to lose money and then doing nothing else worthwhile? Perhaps talking about the CPPI strategy would give us a better picture of what actually defense means to the traders. Let’s now consider how to approach the opposite side of trading.
