Simple Functions
GLOSSARY/ANALYSIS

Risk Concentration

Risk concentration measures how much of your portfolio depends on the same underlying thesis or event. Correlated positions amplify both gains and losses, creating hidden portfolio risk.

CLI:sf portfolio risk

The Hidden Risk in Prediction Markets

New traders often think they're diversified because they hold five different contracts. But if all five are recession-related, they're really holding one giant bet:

  • KXRECSSNBER-26 (recession declaration)
  • KXGDP-26Q2-TNEG (negative GDP)
  • KXUNRATE-26JUN-T5.0 (high unemployment)
  • KXCPI-26MAR-T3.5 (high inflation)
  • KXFEDRATE-26JUN (rate cut)

If the economy stays strong, all five positions lose simultaneously. That's not five independent bets — it's one concentrated macro bet.

Measuring Concentration

SimpleFunctions tracks risk concentration at two levels:

  1. Thesis level: How much capital is deployed on a single thesis?
  2. Node level: How much capital depends on a specific causal node?

If node n1 (labor market deterioration) drives 80% of your portfolio's expected value, and new data invalidates n1, you lose 80% of your expected profits in one event.

Managing Concentration

Rules of thumb:

  • No single thesis should represent more than 30% of deployed capital
  • No single causal node should drive more than 20% of portfolio expected value
  • Uncorrelated theses provide better risk-adjusted returns

Concentration vs. Conviction

High conviction in a thesis is fine — but express it through position sizing on your best edge, not through adding every marginally related contract. Five contracts with 14-point edge each are worse than two contracts with 14-point edge and two uncorrelated contracts with 8-point edge.

Example

sf portfolio risk

Portfolio: $2,500 deployed across 8 positions

Risk concentration analysis:
  Thesis: "Recession 2026"    Exposure: $1,800 (72%)  ← TOO HIGH
  Thesis: "Iran escalation"    Exposure: $500 (20%)   ✓
  Thesis: "Fed policy shift"   Exposure: $200 (8%)    ✓

Causal node concentration:
  n1 (labor deterioration)     Drives: 55% of portfolio EV ← HIGH
  n2 (consumer spending)       Drives: 25% of portfolio EV
  n3 (Fed error)               Drives: 12% of portfolio EV

Recommendation:
  ⚠ Reduce recession thesis to <50% of portfolio
  ⚠ Consider hedging n1 exposure with a counter-position

Related Terms

Position Sizing

Position sizing determines how many contracts to buy based on your edge size, confidence level, and bankroll. The Kelly criterion is the mathematically optimal approach: bet a fraction of your bankroll proportional to your edge.

Stop Loss

A stop loss is a pre-defined exit condition that closes your position when the price moves against you past a threshold. In prediction markets, stops can be based on price, thesis confidence, or causal node changes.

Causal Tree

A causal tree is a structured probabilistic model that breaks down a complex event into a hierarchy of independent, verifiable sub-conditions. Each node has a probability, and the tree computes the overall probability of the root event.

Thesis

A thesis is a structured investment argument that combines a directional view, a causal model of why the view is correct, and specific market positions that express the view. In SimpleFunctions, a thesis is the core unit of analysis.

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