Framework
Capital Allocation Framework
How qualified decisions are prioritized for resource deployment under constraints.
Overview
Qualification answers a binary question: has this idea earned the right to execute? Allocation answers a fundamentally different question: given everything that has earned the right, where should limited resources go? These are distinct architectural concerns that require separate infrastructure.
The Capital Allocation Framework makes visible the system that sits between qualification and execution. It governs how qualified opportunities are ranked, sized, diversified, and monitored as a portfolio — not as isolated decisions. The unit of analysis shifts from the individual strategy to the collection of strategies competing for the same pool of capital.
This framework is constraint-driven. Capital is finite. Attention is finite. Correlation is real. The allocation layer exists because qualification alone cannot produce a coherent portfolio — it can only produce a set of individually worthy candidates. Allocation imposes portfolio-level coherence on that set.
Design Principles
These are governing constraints, not guidelines. Every architectural decision in the framework must be traceable to one of these principles.
Qualification Is Not Allocation
A decision that has earned the right to execute has not yet earned a specific share of resources.
Qualification establishes eligibility. Allocation establishes priority. Conflating them produces portfolios where every qualified strategy receives equal capital regardless of fit, correlation, or environmental context. The separation forces explicit reasoning about resource distribution.
Portfolio-Level Thinking
Every allocation decision must be evaluated in the context of the existing portfolio, not in isolation.
A strategy that looks excellent in isolation may be redundant, correlated, or regime-mismatched when viewed alongside what is already deployed. Allocation intelligence requires awareness of the whole, not just the candidate.
Regime-Aware Sizing
The same qualified strategy deserves different resource allocation under different environmental conditions.
A trend-following strategy qualified during a trending regime should receive less capital allocation when the environment shifts to choppy conditions. Regime awareness prevents static allocation from becoming stale allocation.
Isolation Preserves Attribution
Each allocation must operate with independent capital, independent positions, and independent risk limits.
Shared capital pools make outcome attribution impossible. When strategies share resources, you cannot distinguish whether a result came from the strategy or from portfolio interaction effects. Isolation is not just a safety measure — it is an epistemic requirement.
System Map
Five layers from qualification output to active capital management. Qualified decisions flow downward through increasingly concrete resource commitment. Performance evidence flows upward, informing reallocation and rebalancing.
Layers & Components
Each layer has distinct responsibilities, inputs, outputs, and ownership. No component spans multiple layers.
Qualification Assessment
Receives qualified decisions and structures their evidence for allocation consideration. The boundary between earning the right to execute and competing for resources.
Evidence Intake
Transforms qualification output into allocation-relevant metrics
Fit Scoring
Evaluates how well a qualified strategy fits the current environment and portfolio
Allocation Intelligence
Ranks and prioritizes qualified candidates based on evidence strength, environmental fit, and portfolio-level considerations.
Composite Ranker
Produces advisory rankings across qualified candidates
Correlation Analyzer
Detects redundancy and concentration risk across candidates
Diversification Constraints
Enforces structural diversity across the allocated portfolio
Exposure Management
Governs the actual resource commitment — position sizing, leverage limits, and aggregate exposure.
Position Sizing
Determines capital allocation per strategy within portfolio constraints
Leverage Governor
Constrains leverage within safety limits across the portfolio
Risk Guard
Circuit breakers and hard limits that override allocation decisions when safety thresholds are breached.
Drawdown Monitor
Detects and responds to per-strategy and portfolio-level drawdowns
Exposure Cap Enforcer
Prevents aggregate exposure from exceeding system safety limits
Rebalancing
Responds to environmental and performance changes by adjusting the active portfolio over time.
Regime Transition Response
Adjusts allocation priorities when environmental conditions change
Capital Reallocation
Manages capital flow between strategies via top-up and reduce operations
States & Transitions
A decision moves through these states as it accumulates evidence. Each transition is gated — there are no free promotions.
Qualified
Has earned the right to execute but has not yet been allocated resources.
Entry: Passes qualification gates with regime proof
Exits: Selected for allocation -> Eligible · Disqualified -> Removed
Eligible
Passes portfolio-level checks (diversity, correlation, fit). Ready for capital commitment.
Entry: Allocation intelligence ranks favorably, diversification constraints met
Exits: User commits capital -> Allocated · Regime shift reduces fit -> Qualified
Allocated
Capital committed and deployed. Actively trading with real resources.
Entry: Exchange connection verified, capital deposited, fee status clear
Exits: Performing within bounds -> Active · Drawdown breach -> Reduced
Active
Running in steady state. Subject to continuous monitoring and rebalancing.
Entry: Allocation stable, no circuit breaker triggers
Exits: Capital adjusted -> Reduced · Regime transition -> Paused · Kill switch -> Removed
Reduced
Capital partially withdrawn due to performance, rebalancing, or user directive.
Entry: Capital reduce executed, remaining allocation >= minimum
Exits: Capital topped up -> Active · Fully withdrawn -> Removed
Removed
Allocation terminated. Capital returned. Strategy may remain qualified for future reallocation.
Entry: Kill switch, full capital withdrawal, or disqualification
Exits: Re-allocated with new capital -> Allocated
| From | To | Trigger | Guard |
|---|---|---|---|
| Qualified | Eligible | Allocation intelligence evaluation | Fit score above threshold, diversification constraints met, no high correlation with existing portfolio |
| Eligible | Allocated | User promotion with capital | Exchange connection, sufficient balance, fee status clear, bot capacity available |
| Allocated | Active | First tick evaluation | Capital deposited, strategy spec loaded |
| Active | Reduced | Capital reduce or rebalancing | No open position, remaining capital >= $5 |
| Active | Removed | Kill switch or disqualification | Open positions closed, capital returned |
| Reduced | Active | Capital top-up | No open position, sufficient available balance |
Boundary Rules
Boundaries define what crosses between layers and what does not. Every boundary has an explicit failure mode.
Qualification -> Allocation
Qualification status, evidence trail, regime proof, behavioral profile, fit scores
Raw backtest trades, paper account internals, qualification computation details
Unqualified strategy cannot enter allocation pipeline. No backdoor from generation to capital.
Allocation Intelligence -> Exposure Management
Advisory ranking (increase/hold/avoid), candidate profile, portfolio diversity assessment
Binding position sizes or leverage decisions. Intelligence advises; exposure enforces.
Missing intelligence -> conservative defaults. Allocation intelligence is advisory, never autonomous.
Exposure Management -> Risk Guard
Proposed position sizing, aggregate exposure state, margin utilization
Risk guard does not see strategy logic, qualification evidence, or allocation rationale. It only sees exposure numbers.
Risk guard breach -> immediate rejection or kill. No negotiation. Hard boundary.
Risk Guard -> Rebalancing
Kill signals, pause directives, drawdown alerts
Risk guard does not suggest rebalancing targets. It only constrains.
Rebalancing without risk guard input -> potential safety violation. Risk guard has veto power.
Operational Semantics
How this framework operates in practice — cadence, consumers, and staleness rules.
| Dimension | Value | Rationale |
|---|---|---|
| Fit score materialization | Weekly (Monday 4am UTC) | Fit scores are computationally expensive and change slowly. Weekly materialization balances freshness against cost. |
| Allocation intelligence evaluation | Every 6 hours (batch) | Runs alongside qualification assessment. Computes Sharpe, correlation, diversity scores for all active strategies. |
| Exposure monitoring | Continuous (per-tick) | Every paper and live tick evaluates position state against exposure limits. 1-minute cadence. |
| Risk guard enforcement | Continuous (per-tick) | Circuit breakers evaluate on every tick. No batch delay for safety-critical checks. |
| Rebalancing cadence | Event-driven (regime transitions) + daily (lifecycle evaluation) | Regime transitions trigger immediate response. Daily lifecycle sweep handles gradualnchanges. |
| Capital flow operations | On-demand (user-initiated) | Top-up and reduce are user actions, not automated. System advises; user decides. |
| Correlation computation | Every 6 hours (M5 model) | Portfolio correlation matrix recomputed in eval batch. Feeds diversity score and high-correlation warnings. |
Knowledge Lineage
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See this framework implemented in Orqis