Bankruptcy rules

Also seen as: 10% floor, total loss

When is a run treated as bankrupt?

When its value crosses below one tenth of its reference capital, checked at each daily close. Both levels use the same test on a different reference: the whole run measures against the capital it started with, and a strategy inside a Combined measures against the capital most recently allocated to it.

where: $V_t$ is the value at the close of day $t$; $V_0$ is the reference capital — the starting capital for the whole run, or the capital last allocated to that strategy inside a Combined; and $-0.9$ is the threshold, a loss of 90%. Reaching it is the same thing as a total return worse than −90% against that reference.

What happens after the whole run goes bankrupt?

Everything closes and the curve stays flat. All positions are liquidated on the day the floor is crossed, no new positions are opened, and the capital curve runs flat from that day to the end of the backtest. It is permanent for that run: the whole-run test measures against the original starting capital and is never re-armed, so a later market recovery cannot restart it. The run still completes and its results are served normally — the flat line and the metrics that follow from it are the result, not an error, and the run status reads Up to date like any other finished run.

What happens after one strategy inside a Combined goes bankrupt?

That strategy is closed, and it can come back. The same 90% test is applied to each strategy inside a Combined against the capital last allocated to it; a strategy that crosses the floor has its positions closed and stops trading, while the rest of the Combined carries on. Because its reference capital is reset every time capital is routed to it, a later rebalance that allocates to that strategy starts it again from the new amount. So a strategy's bankruptcy inside a Combined is a gap in that strategy's participation, not the end of it.

What is a sudden move to negative capital?

A gap large enough to skip the floor entirely. If a price move takes the value straight from above the threshold to below zero — rare, and associated with leveraged exposure — there is no valid state left to continue from, and the simulation is marked Failed rather than flatlined. A Failed run has no results to read; the distinction matters because the ordinary bankruptcy case does produce a full, readable result.

Defaults in Fincanva

• The threshold is fixed at 10% of the reference capital and is not a setting you can change or switch off.
• It is evaluated at each daily close, so a level breached and recovered within a single day is not what the test reads.
• The whole-run case is permanent for that run; the case for a strategy inside a Combined is restartable at a later rebalance.
• A bankrupt run is a completed run: the flat curve, the drawdown and the metrics are all reported.
• The rule is a stopping condition inside the simulation: it describes what the backtest does when the floor is crossed, not what a broker or an exchange would do.

Worked example

A strategy starts with $100,000 and holds a leveraged position. During a sharp decline its value falls to $9,500 at a daily close — below the $10,000 line that is 10% of the starting capital — so the run is treated as bankrupt: every position is closed that day and the capital curve is flat from there to the end of the backtest, even though the market recovered afterwards. The result is still served in full, showing a maximum drawdown of about 90% and a flat tail.

Now the same test one level down. A Combined allocates $10,000 to one of its strategies at the January rebalance; that strategy falls to $900 by March — below 10% of the $10,000 it was given — so it is closed and stops trading while the Combined's other strategies continue. At the July rebalance the Combined allocates to it again, $8,000 this time; its reference capital is now $8,000, and it resumes trading from there. The same strategy has therefore been bankrupt and active within one backtest, which the whole-run case can never be.

Backtests show what would have happened — not what will. Fincanva provides no financial advice — see Is this financial advice?.