# Bybit 4-edge Leverage Overlay — Design

**Status:** draft for review
**Date:** 2026-07-03
**Author:** research + design dialogue (see session)

## Goal

Add **validated, differentiated leverage** to the `bybit_4edge` deploy book so the small ($35k) pilot compounds faster — WITHOUT breaching a hard drawdown/ruin tolerance — by **re-tuning and validating the existing `paper_book` risk overlay** on the funding-net Bybit baseline. We do NOT build new leverage machinery; the vol-target + killswitch overlay already exists and is the right tool. The deliverable is a re-tuned, capped, stress-tested overlay plus a shadow forward track, gated so real capital only ever rides the levered book after it validates out-of-sample.

## Why (research findings that justify this design)

All numbers below are from the funding-net baseline (`bybit_sleeve_ret`, 2010 days, 2021-01…2026-07) computed this session.

1. **The venue does not cap us.** At $35k spread over ~68 liquid USDT-perps, every position sits in Bybit Tier 1: max leverage (125x BTC / ~50x alts) and lowest MMR (0.5% / ~1–2.5%) on every symbol. We never approach a tier limit.
2. **Liquidation does not cap us either.** A diversified cross-margin book never margin-called in bootstrap up to 3x gross (P(liq)=0%). Fully-hedged positions in cross margin are ADL-exempt, protecting the delta-neutral sleeves.
3. **The binding constraint is the multi-year drawdown tail.** Book-level (uniform-leverage) ruin bootstrap (<5% chance of −35% in a year, <1% liq):

   | gross L | P(maxDD≥35%)/yr | realized maxDD (5.5yr path) |
   |---|---|---|
   | 1.0x | 0% | −27.9% |
   | 1.5x | 0.3% | **−39.6%** |
   | 2.0x | 2.0% | **−49.9%** |
   | 2.5x | 6.7% | −56% |

   The 1-year bootstrap alone suggests L_max≈2.2x, but the **realized 5.5-year path hit −50% at 2x / −40% at 1.5x** — a fund holds for years, so the multi-year tail governs. Honest book-gross ceiling: **~1.3–1.5x**.
4. **Per-edge leverage capacity varies enormously** — leverage belongs on the low-vol neutral sleeves, not uniformly:

   | sleeve | Sharpe | vol/d | worst day | 0.25-Kelly | role |
   |---|---|---|---|---|---|
   | xsfunding (carry) | 3.56 | 0.20% | −1.5% | 22.8x | **workhorse** |
   | positioning | 2.97 | 1.69% | −4.9% | 2.3x | moderate |
   | unlock | 1.04 | 1.01% | −5.9% | 1.3x | light |
   | crypto_tstrend | 0.70 | 2.25% | −13.7% | 0.4x | **~1x, liquidation vector** |
5. **Carry is genuinely robust, not a steamroller.** It made money through the two worst crashes of the cycle: LUNA (2022-05) +1.01%, FTX (2022-11) +3.11%; worst single day in 5.5y = −1.5%. Leveraged: 5x → +96% CAGR / −19% realized DD / 0% ruin; but 10x → −35% DD, 20x → −60% DD, 50% ruin. **Sharpe never improves with leverage.** Safe carry ceiling under the moderate tolerance: **~5–8x**.

**Conclusion:** don't lever the naive eq-wt book uniformly (that levers the weak trend sleeve into its liquidation vector). Concentrate leverage on carry (~5–8x) and positioning, keep trend ~1x, cap book-gross ≤1.5x — exactly what an ISV-adaptive inverse-vol weight + vol-target overlay does. Re-tune it on these numbers, cap it, stress it, gate it.

## Non-goals (YAGNI)

- No new leverage engine — reuse `paper_book.IncrementalRiskOverlay` / `paper_risk_overlay`.
- No reactive de-sizing controllers — A/B-rejected 3× (pro-cyclical); final = ex-ante K(D*) + rare killswitch. (See `pearl_fxhnt_reactive_risk_controllers_rejected`.)
- No change to the honest naive forward track — it stays as the unlevered floor.
- No real-capital deployment as part of this work — capital gating is a later, separate decision.

## Phasing (approved: shadow track first, learn, then re-tune)

- **Phase 1 — Static-leverage shadow track (observe-only, ship first).** Apply a SIMPLE, explicit differentiated leverage vector taken straight from the research (starting point: carry 5x, positioning 2x, unlock 1.5x, trend 1x, then scaled so book-gross ≤ 1.5x) to the same daily 4-edge book, and record it as the shadow track `bybit_4edge_levered` alongside the honest naive track. NO capital, NO adaptive re-tune, NO killswitch yet — just observe the levered book live vs its backtest and vs the naive track. We learn: does the levered book reconcile OOS? does the realized DD behave? is carry's live tail as benign as the backtest?
- **Phase 2 — Adaptive re-tune + hard caps + killswitch + stress (later, informed by Phase 1).** Only if Phase 1's shadow track validates: replace the static vector with the re-tuned `isv_adaptive_weights` overlay, add the safety rails and the DD-calibrated killswitch, and the stress tests. This is where capital-readiness is decided.

The components below are the full design; **Phase 1 implements only Component 3 with a static leverage vector** (Components 1–2 and the killswitch are Phase 2).

## Design

### Component 1 — Re-tune the overlay on the funding-net Bybit baseline
The overlay (`isv_adaptive_weights` + `adaptive_target_vol` + `vol_target_leverage` + `DrawdownKillSwitch`) is currently Binance-mirage-tuned. Recompute its parameters (target vol, gross cap, kill/re-enter drawdown) against `bybit_sleeve_ret`. The ISV-adaptive inverse-vol weighting already overweights the low-vol carry sleeve and de-levers the high-vol trend sleeve — verify it reproduces the target envelope (carry-heavy, trend-light) on these numbers.

### Component 2 — Hard safety rails (on top of the adaptive weights)
Adaptive is not enough for real money; add explicit caps as constants (ISV-derived where a bound is natural, fixed where it is a risk limit):
- **Book-gross cap:** `MAX_BOOK_GROSS = 1.5x`.
- **Per-sleeve leverage caps:** carry ≤ 8x, positioning ≤ 2.5x, unlock ≤ 1.5x, trend ≤ 1.0x. (Rails, not targets; the adaptive weights choose within them.)
- **Killswitch** calibrated to the ruin line: flatten booked exposure when the shadow drawdown breaches the level that keeps realized maxDD inside −35%; re-enter per the existing `reenter_dd`.

### Component 3 — Shadow levered forward track
The nightly already records the naive unlevered `bybit_4edge` track. Add a SHADOW track `bybit_4edge_levered` that applies the re-tuned overlay to the same daily book, recorded alongside — so we can compare the levered book live before any capital rides it. Same `ForwardTracker`, its own state file; reconciliation gate wired the same way (needs its own `backtest_summary` row — see `reference_fxhnt_forward_gate_two_store_sync`).

### Objective & success criterion (honest)
Leverage does not raise Sharpe; its value is **capital efficiency / growth** for the sub-viable $35k pilot. Success = **maximize CAGR subject to** (multi-year realized maxDD ≤ 35% with the killswitch active) AND (bootstrap P(maxDD≥35%/yr) ≤ 5%, P(liq) ≤ 1%) AND (survives the LUNA/FTX windows) AND (survives a stress test with a deliberately fattened carry tail). If the levered book cannot beat the naive book's CAGR at equal-or-lower drawdown-tolerance breach, it is not worth the risk — ship nothing.

## Data flow
`bybit_sleeve_ret` (funding-net baseline) → overlay re-tune (offline, own-memory Job) → overlay params + `backtest_summary(bybit_4edge_levered)` persisted → nightly `bybit_4edge_levered_nav` asset steps the shadow ForwardTracker → `cockpit_forward` ingests → cockpit shows naive vs levered side by side.

## Testing (TDD)
- Overlay re-tune reproduces the target envelope (carry-weighted, trend ≤1x) on a seeded funding-net store.
- `MAX_BOOK_GROSS` and per-sleeve caps are enforced (levered daily gross never exceeds the cap).
- Killswitch fires at the calibrated DD line and re-enters correctly.
- Crisis-window survival (LUNA/FTX slices) — levered book DD within tolerance.
- Bootstrap ruin of the levered book ≤ tolerance (P(maxDD≥35%/yr) ≤ 5%).
- Stress test: inject a synthetic −10% carry day (unseen in history) and assert the killswitch + gross cap bound the loss short of wipeout.
- Shadow track: `bybit_4edge_levered` reconciliation gate gets its `backtest_summary` reference (regression against the silent-degrade bug).

## Risks & mitigations
- **Backtest tail understates reality** (winsorized ±25%/day; no dislocation worse than LUNA/FTX in-sample) → the stress test + killswitch + the 1.5x book cap are the backstops; err toward WAIT.
- **Concentration** — carry at 8x makes the book a levered carry bet, losing 4-edge diversification → the book-gross cap and per-sleeve caps bound how far concentration goes; keep trend/unlock live for uncorrelated ballast.
- **Regime dependence** — carry Sharpe 3.56 rides the current funding/basis structure; erosion + leverage compounds losses → the shadow track must validate OOS before capital; monitor funding-regime decay.
- **False-PASS on the levered gate** — the levered shadow track MUST reconcile against its own funding-net backtest reference (not silently degrade). Real capital only after BOTH the naive gate PASSes AND the levered shadow validates.
