Two Languages of Risk Control
Sizing decides how large a bet should be; safety decides when to stop. They are different control systems, and merging them is the most dangerous mistake in risk design.
Key ideas
Sizing is continuous and decides how big a bet is; safety is discrete and only passes, vetoes, or forces reduce-only, so a safety signal should never scale positions.
Market-neutral is not crisis-neutral: neutral books are hurt most by crowded peers deleveraging, so safety must watch the strategy's own drawdown, signal decay, and leg divergence.
The safety layer's veto must be an architectural property with no path from strategy to broker around it, because it has to work when the monitored system misbehaves.
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Written by Wayland Zhang, founder of Dnalyaw.