Best custom benchmark to use for market-neutral strategies?

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Best custom benchmark to use for market-neutral strategies?

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I've been using Quantopian this year for an independent project as part of my MBA. I've been modelling academic papers and trying to implement them as small-scale versions of hedge fund strategies.

One problem I have is that, for a market neutral strategies (for simplicity let's say that is beta -0.30 to 0.30, in line with the Quantopian Open guidance), SPY is the wrong benchmark. SPY will typically beat an unlevered market neutral strategy, even if it produces moderate alpha, because SPY is taking more market risk (it has a beta of 1, of course). My supervisor said typically you'd compare a back test on a 'market neutral' strategy to the HFRI or HFRX (hedge fund) index. There isn't a robust ETF to track those indicies (I think).

Does anyone have ideas for things we can use as a benchmark that are compatible with Quantopians set_benchmark function (i.e. are a traded stock)?

1 response

Christopher Doffing

If the return has no beta, ten its alpha. The proper benchmark for a true market neutral portfolio is the risk-free rate. 30-day t-bills would work.

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.