Gold Futures Strategy: Diagnosing a Notional Scaling Problem

Alqama was building a gold futures mean reversion strategy as part of a multi-asset portfolio at the proprietary trading firm. The strategy had been validated across multiple market conditions, including breakout, consolidation, rally, and elevated volatility periods, and remained consistently profitable across train, validation, and test datasets.

When he evaluated performance in the most recent period, the strategy was generating significantly lower returns. His first instinct was to check whether the alpha had degraded. It had not. The signals were still working. The Sharpe and Calmar ratios were within acceptable range across historical regimes.

The real issue was structural. Gold had moved from roughly $1,300 in 2018 to over $3,200 by 2025. The strategy was sized at one standard COMEX futures contract throughout. That same contract now carried more than twice the dollar risk it had during the development period, because the notional value of the position had scaled with the price of gold while the contract count stayed fixed. This was a notional scaling problem specific to minimum contract sizes on standard futures, not alpha degradation.

Alqama documented the diagnosis and proposed a portfolio-level solution. Because the gold strategy's return drivers were uncorrelated with volatility futures dynamics, he began constructing a second alpha on volatility futures to run alongside it. The combined portfolio eliminated the negative years that the gold strategy experienced in isolation, reducing portfolio-level risk without abandoning the original strategy's edge.

The work reinforced a principle he now applies consistently: before adjusting a model, validate whether the original assumptions still hold under current market conditions.