How does model allocation work?

Modified on Mon, 28 Apr at 7:01 PM

In Fincanva, model allocation settings determine how your model distributes capital among the assets it selects.
These settings are critical for shaping your strategy’s:

Performance
Risk exposure
Responsiveness to market conditions

Choosing the right allocation method — and configuring how much of your capital is invested — allows you to fine-tune how your model behaves over time.

Overview of Allocation Methods

Fincanva offers a variety of allocation approaches, ranging from simple to highly sophisticated:

Allocation Method	Description
Equal Weights	Capital is split evenly across all selected assets.
Fixed Weights	Manually assign specific percentages to each asset.
Ranking Based	Allocate more capital to higher-ranked assets based on defined metrics.
Risk Scaling	Allocate less to more volatile assets, favoring stability.
Market Cap Weighted	Allocate more to larger companies based on their market value.
Beta Neutral	Balance long and short positions to achieve near-zero net market exposure.
Floating	Allow weights to drift with market movements instead of rebalancing every interval.
Minimum Correlation	Prioritize assets with the least correlation to each other for better diversification.
Risk Parity	Equalize risk contribution across all assets, not just capital amounts.
Mimicking Portfolio	Attempt to replicate a benchmark index or portfolio composition.
MPT (Modern Portfolio Theory)	Optimize the portfolio for the best historical risk-return trade-off, using statistical analysis.

Special Options for MPT (Constraints)

When using Modern Portfolio Theory (MPT) as your allocation method, you can also set constraints:

Positive Weights
Constrained weights
Diversified

This adds an extra layer of customization to your optimized portfolios.

Managing the Leverage

In addition to choosing an allocation method, you can configure the leverage setting at the model level.

Leverage does not control how much of your total portfolio capital the model receives —
that is determined by your portfolio allocation rules.
Leverage controls how much of the model’s assigned capital is invested into assets.

In Fincanva, you directly set a leverage value as a number, such as:

0.7 for 70% investment,
1 for 100% investment (full use of available capital),
2 for 200% investment (using simulated leverage).

In Fincanva, the maximum allowed leverage per model is 2.0.

How Allocation Choices Affect Your Strategy

The method you select has a direct impact on your model’s behavior:

Simpler methods (e.g., Equal Weights): Offer easy diversification but ignore asset-specific characteristics.
Advanced methods (e.g., Risk Parity, MPT): Optimize risk-return balance but involve greater complexity.
Dynamic methods (e.g., Floating): Allow your portfolio to adapt naturally to market movements without constant rebalancing.

Choosing the right combination of:

Allocation logic
Invested capital percentage

...helps you align your model with your desired risk profile, investment philosophy, and market responsiveness.