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I have a 14 year backtest for a systematic strategy that uses a static notional per each position. On any given day I could have multiple positions long and short and notional long and short.

How do I standardize my returns to show the correct % return from the portfolio?

Notional per trade= 10k
20 Longs= 200k notional long
5 Shorts= 50k notional short
Say I make 2k on my longs is 1%
Say I lose 2k on my shorts is (4%)

How do I derive a standardized percentage return for the portfolio as a whole? What is "industry standard"?

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  • $\begingroup$ Very simple, (1) Make sure we talk 1 base currency, if not then first convert your pnl to 1 base ccy which matches with the ccurrency of your capital base (2) you then need to decide on what you base your relative returns on: Total capital available or invested/employed capital, .... (3) you know your base ccy return, so simply divide it by what you decided in (2). $\endgroup$
    – Matt Wolf
    Jun 19, 2013 at 2:00
  • $\begingroup$ Thanks Matt- the currency isn't the issue as everything is the same currency. what do I use as the denominator in finding my % return ? $\endgroup$
    – Steeple
    Jun 19, 2013 at 3:29
  • $\begingroup$ entirely up to you and what particular return you try to measure. ReturnOnInvestedCapital -> use only the capital that was actually locked up in your investments (unleveraged). But be careful here, if you want to be conservative and show yourself/your clients that you understand risk then you may want to include a reserve in InvestedCapital that accounts for model risk and other unexpected events. It lowers your relative return but it is way more conservative. If you just look at return on total equity then use your whole equity base. $\endgroup$
    – Matt Wolf
    Jun 19, 2013 at 3:56

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