Did you by any chance run the same experiment for going Long only? There can be - as you mention - issues with short selling both operationally and emotionally - therefore wondering what the result would be if you only went long the top quartile in your model?
Thanks! Yes, a long-only model also works, but it is not as impressive. In my view, it is not worth reporting... the key benefit of this model, imho, is market neutrality, which is only achieved with longs and shorts.
There's one improvement related to your idea, though: implement a simple market regime prediction model and tilt to long-bias if in a bull regime, short-bias if in a bear regime, or neutral if in a sideways market
Thanks! Yes, I’ve considered trading costs. But remember: this is a market-neutral strategy with a near-zero correlation to the overall market. That means its returns are largely uncorrelated with market returns, so when combined with a long-only market exposure (e.g., S&P 500), the portfolio's overall performance can benefit from diversification. The returns from this strategy could be additive on a risk-adjusted basis, potentially improving the Sharpe ratio of the total portfolio.
More important than the absolute returns is the fact that the return stream is uncorrelated to the market.
Have you explored aggregating these sentiments over longer periods ( weekly/ monthly? )
Yes! There are 4 additional explorations I will write about in follow up pieces:
1. Weekly/monthly rebalancing
2. Using more features (price action, supply/demand imbalance, etc)
3. Using non-linear models
4. Incorporating short inventory/availability data
Looking forward to it!
one of your best articles yet!
Did you by any chance run the same experiment for going Long only? There can be - as you mention - issues with short selling both operationally and emotionally - therefore wondering what the result would be if you only went long the top quartile in your model?
Thanks! Yes, a long-only model also works, but it is not as impressive. In my view, it is not worth reporting... the key benefit of this model, imho, is market neutrality, which is only achieved with longs and shorts.
There's one improvement related to your idea, though: implement a simple market regime prediction model and tilt to long-bias if in a bull regime, short-bias if in a bear regime, or neutral if in a sideways market
Very cool article. Average pnl seems kind of low though. Did you factor in slippage?
Thanks! Yes, I’ve considered trading costs. But remember: this is a market-neutral strategy with a near-zero correlation to the overall market. That means its returns are largely uncorrelated with market returns, so when combined with a long-only market exposure (e.g., S&P 500), the portfolio's overall performance can benefit from diversification. The returns from this strategy could be additive on a risk-adjusted basis, potentially improving the Sharpe ratio of the total portfolio.
More important than the absolute returns is the fact that the return stream is uncorrelated to the market.
Cheers!