Now that the contest's rules have changed, should I continue to prioritize a higher sharpe or start aiming for a lower alpha? Considering that my algo has both a > 0.6 sharpe and a < 0.3 alpha.
FYI and just so the first answers make sense, I edited this post. I met alpha but wrote beta at first.
I would go with Sharpe, given that beta is still kept below the threshold.
Beta is one 1 metric, while many other metrics are geared toward reliable, less volatile return stream.
Hi Aitor,
That's a great question - they are both important!
In terms of prioritizing, the way I'd think about it is that you're trying to maximize your strategy's Sharpe ratio, with the constraint of not exceeding a beta of +/- 0.3 on a rolling 1 year basis.
I'm not sure what techniques you are using, but one common (and I think good) way to manage your strategy's Beta is to take advantage of the fact that shorting a stock gives you negative Beta. A market neutral strategy that holds $100,000 long and $100,000 short should have a Beta of close to zero as long as the stocks held long and short are comparable in their own Beta exposures.
Hope that's helpful advice and please feel free to follow up with more questions!
Good luck in the contest, Jess
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Of course oppressive adherence to a fixed range for Beta excludes hundreds of no doubt viable strategies. A better way would have been to build the composite strategy ranking score, using real world metrics (as has been exhaustively discussed here) and over weight Beta such that it tips the scales toward low Beta. For then even a .5 or .7 beta would still be admissible assuming that such a strategy would have to have had a stellar Sharpe, P&L, low DD, win/loss % (oh wait that's not part of the metrics here), etc.
The market Q is pursuing wants a 'pure alpha.' So, to ensure a low alpha when all of the black-box algos are cobbled together, they need to keep the beta in check by brute force. Otherwise, they'd be left with trying to weight the algos long/short into a product with low beta, while still maintaining Sharpe. At least that's my understanding, after Justin provided some guidance on their strategy vis-a-vis the market for hedge fund products. All fine. My only complaint is that I wish they'd explained this 'pure alpha' business last year (which is well-known in the industry, as it turns out). The discussion then was about uncorrelated return streams, with no guidance on beta that I recall (although I guess after a head-scratch, it was realized that getting uncorrelated return streams would be impossible without low beta).
Correct, Jess?
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.
