1. The point of showing a benchmark is just to have a comparison... imho, the best benchmark should be an index tracking market-neutral hedge funds, such as HFRX. If we want to be rigorous, the whole comparison of this strategy with S&P 500 is not fair, not only because of leverage, but also (and maybe mo…
1. The point of showing a benchmark is just to have a comparison... imho, the best benchmark should be an index tracking market-neutral hedge funds, such as HFRX. If we want to be rigorous, the whole comparison of this strategy with S&P 500 is not fair, not only because of leverage, but also (and maybe most importantly) because of the market neutrality! Comparing a market-neutral strategy with a long-only strategy is not apples to apples... I use S&P 500 because it's free, and to simplify.
2. That's a great question. In my back-of-napkin math, I wouldn't trade this with less than a couple of million usd.
3. Another great point. Someone asked the same question on Twitter. Imho, this is one of the main reasons why we must forward-test before putting strategies into live mode. After a few 3-6 months of forward test, we could not only get the cost of shorting right, but also short availability. Imho, it's counter-productive to try to include everything in backtests - it makes them too complex to run. The purpose of backtests should be to discard bad ideas (fast). If an idea is not discarded, then it moves to the next phase: forward testing. In this phase, we can collect more details about the execution, such as borrowing fees.
Thanks, Eugene! To the questions:
1. The point of showing a benchmark is just to have a comparison... imho, the best benchmark should be an index tracking market-neutral hedge funds, such as HFRX. If we want to be rigorous, the whole comparison of this strategy with S&P 500 is not fair, not only because of leverage, but also (and maybe most importantly) because of the market neutrality! Comparing a market-neutral strategy with a long-only strategy is not apples to apples... I use S&P 500 because it's free, and to simplify.
2. That's a great question. In my back-of-napkin math, I wouldn't trade this with less than a couple of million usd.
3. Another great point. Someone asked the same question on Twitter. Imho, this is one of the main reasons why we must forward-test before putting strategies into live mode. After a few 3-6 months of forward test, we could not only get the cost of shorting right, but also short availability. Imho, it's counter-productive to try to include everything in backtests - it makes them too complex to run. The purpose of backtests should be to discard bad ideas (fast). If an idea is not discarded, then it moves to the next phase: forward testing. In this phase, we can collect more details about the execution, such as borrowing fees.
Cheers!