The S&P 500’s long-term return of 14% annually since 2012 is indeed impressive, but comparing it to an algorithmic trading system, especially one focused on S&P futures, overlooks several nuances. Here’s why a strategy like this holds value:

Drawdown Management: The S&P 500’s historical returns don’t reflect the risk or drawdowns investors endured along the way (e.g., the 2020 COVID crash). An algorithmic trading system can offer tighter control over drawdowns. For example, if your strategy has a 10% maximum drawdown compared to the S&P’s ~30%+ during crises, it provides a smoother equity curve and less emotional stress.

Capital Efficiency: Algorithmic strategies typically do not tie up capital 100% of the time. A system trading S&P futures might take a few high-probability trades per month, freeing capital to be deployed in other strategies or markets. This allows you to diversify, improving your portfolio’s overall performance and reducing single-market dependency.

Portfolio Building: One strategy might not outperform the S&P consistently, but combining multiple uncorrelated systems across different markets (e.g., S&P, Crude Oil, Gold) creates a robust portfolio. A well-diversified portfolio smooths returns and reduces reliance on any single market’s performance, which is crucial for long-term success.

Non-correlation Benefits: Futures-based strategies, even when trading the S&P, often have low correlation to buy-and-hold equity approaches. This makes them a valuable addition to portfolios heavily exposed to equities, offering protection and alternative income streams during bear markets.

Algo trading isn’t about a single trading system but building a portfolio that manages risk, smooths returns, and grows capital consistently under diverse market conditions.

I generally stay away from the Kelly formula because it’s often too aggressive. But it would be kind of interesting worth testing. I’ll put it on the to-do list and update the article. Thanks for the email!

Kelly % = W – [(1 – W) / R]

Where:
W = Winning probability
R = Win/loss ratio

This should give a much larger profit.

See: Money Management Using The Kelly Criterion https://www.investopedia.com/articles/trading/04/091504.asp#ixzz5PPFHZmgl