May 29, 2018

Recently, Quantopian released its white paper, Quantopian Risk Model, where it discusses market-neutral and beta-neutral stock trading strategies. The purpose of the paper was to show what is required, at least for them, or more likely, what their contest participants should seek when designing market-neutral trading strategies. That is if they wanted to be part of the small and select group that might see their trading program receive a funding allocation and get a participation in the generated profits.

I disagreed with some of the findings. And posted the following on their forum. It leads to an HTML file where I make my arguments. There is some math, but it is not necessary to understand what is being put forward. The formulas are fully explained.


The white paper emphasized the purpose for which it was released: market-neutral and beta-neutral trading strategies. I find these to have considerable inherent drawbacks. Not for what is described in the paper. We can all shape our trading strategies to do whatever we want. It is more about what the outcome of a market-neutral strategy will produce profitwise over the long term.

When you put the equations in place, it would appear that all you can get might be, at most, the long-term market drift where you do not need to do anything to get it anyway. It is almost provided for free. As an “illusory” gift for participating in the game. Evidently, if you do not play well, you can lose that too.

The final equations in that appraisal might be a major blow to market-neutral trading strategies. We should question the usefulness of these strategies if not their very nature.

When you use equations to describe what you see, it becomes very restrictive. Not because you cannot put equations on the table, but because you use an equal sign which makes it quite a categorical and unequivocal statement.

Follow the argumentation in this HTML FILE, and you should reach the same conclusions as in the ending market neutrality section. 

Created... May 29,  2018, © Guy R. Fleury. All rights reserved.