halfKelly

Half-Kelly is a fractional version of the Kelly criterion used to determine bet sizing or position sizing in gambling and investing. It applies a conservative fraction of the Kelly bet to reduce risk while retaining some long-term growth potential.

Mathematically, for a favorable wager with net odds b and a probability of winning p (with q = 1 − p), the Kelly fraction is f* = (bp − q)/b. The half-Kelly approach uses half of that amount: f = f*/2. A positive f indicates the size of the proposed bet relative to bankroll, while a nonpositive f suggests not placing the bet. In practice, practitioners may cap f at a maximum or adjust for leverage and costs.

Advantages of half-Kelly include lower downside risk, smaller drawdowns, and reduced risk of ruin compared to full Kelly, while still aiming for positive growth. It can be particularly appealing when estimation of p or b is uncertain or when transaction costs and liquidity impose friction.

Disadvantages include slower geometric growth relative to full Kelly, and the method’s effectiveness depends on the accuracy of input estimates. If p or b are misestimated, the strategy can underperform or become more volatile than intended. Like other fractional Kelly variants, it is a heuristic rather than a guaranteed optimal strategy, and it must be adapted to the specific context, including risk tolerance and constraint considerations.

Originating from the Kelly criterion developed by John L. Kelly Jr. in 1956, half-Kelly is one of several fractional approaches used in both gambling and financial markets to balance growth and risk.