@ Hedgequant - Can you ask a more specific question? Is it the "run 4 buckets... look for #5" that you dont understand (seems self-evident). Or the latter point... "some failure condition" (first pass -10% on risk capital, second pass, losing 1/3 of our targeted ann return).
@FDAX - Solving "maxdrawdown". Yeah, I get your point. My point is that solving maxdrawdown is the same thing as having a good pnl stream, but most people focus on the upside and flipping things can illuminate. This breaks out for me in a few ways:
1) If we cannot do really good returns from something with a pretty controlled low drawdown expectation... maybe we dont really know what we're doing. I like to think about it as 3-to-1 ann return/drawdown target.
2) Then we want a basket of things going on, as I proposed in the general approach. Each of these things should be separate and measured separately. It should justify itself and stand alone. (PTJ - "a diverse set of highly skewed reward/risk trades" (or strategies). It then follows if I make a mistake on 1/4 of my book and my theoretical multi-month 10% max draw gets blown through (-20% in weeks or days)... i'm only down 5% on my book. We want to expect surprises and structure around them.
3) Then in each basket/strategy/bucket, etc... I tend to think alot about control. I tend to favor a balanced L/S group of trades. Of course this is wonderful in single stock equities. But it applies just as well in generalized macro trades where it is always easy to peg a "risk long" and a "risk short". Balancing the basket is THE best control for drawdown. Much better than assuming liquidity (small scale, rookie mistake). Of course, at heart this is an understanding of alpha v beta... or trying to "out-perform" risk taking. Anyone can take risk.
Helpful? Make sense?