Topic · Systematic Strategies & Alpha
← All topicsEquity Strategies
29 articles · 4 checkpoints · 19 deeper reads · 6 reference notes
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A long/short book built so that the market's direction does not matter, target beta zero, keep only the relative call. Neutrality raises the Sharpe ratio but shrinks the raw return, which forces leverage, which is where the risk quietly comes back in.
The most common hedge fund structure, own the names you like, short the names you don't, and keep some deliberate net long exposure. The shorts fund the longs and dampen the drawdowns, but they also add borrow costs, gap risk and a beta you almost certainly measured wrong.
The standard test of whether a signal predicts returns, rank the universe, chop it into ten buckets, hold each for a month, and look at the top-minus-bottom spread. It is nonparametric, outlier-proof and produces a tradeable portfolio, which is also why it flatters bad signals.
Rank stocks on any characteristic and you usually end up long one sector and short another by accident. Demeaning the score inside each sector converts an industry bet back into a stock-selection bet, at the cost of some raw return, and usually a big gain in Sharpe.
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