[silentdud]

From what I understand when you have an alpha generating methodology, you can take an offsetting position in the market to neutralize most of the market risk. Has anyone tried offsetting their positions with industry ETF's instead of using SPY? Also, does anyone know of a simple way to eliminate SMB and HML factors from the payoff??? Are there ETF's with this payoff structure???

[SIUYA]

most alpha is simply returns above a benchmark.....this is only relevant to those are happy to loose money when the market looses but claim they outperformed.
Most traders would consider themselves uncorrelated absolute return generators without reference to a benchmark and trading only a few instruments and not a portfolio.....

[silentdud]

Originally Posted by SIUYA »

most alpha is simply returns above a benchmark.....this is only relevant to those are happy to loose money when the market looses but claim they outperformed.
Most traders would consider themselves uncorrelated absolute return generators without reference to a benchmark and trading only a few instruments and not a portfolio.....

I'm not really looking for a debate. I just need a better way to neutralize most irrelevant portions of the returns so that I can specifically capture this abnormality (and nothing else). What is causing the abnormality and where it is from is separate issue. Im working with event driven stuff. I need a better way to neutralize other return factors aside from the movements relevant to other securities.

[SIUYA]

Originally Posted by silentdud »

I'm not really looking for a debate. I just need a better way to neutralize most irrelevant portions of the returns so that I can specifically capture this abnormality (and nothing else). What is causing the abnormality and where it is from is separate issue. Im working with event driven stuff. I need a better way to neutralize other return factors aside from the movements relevant to other securities.

no...no arguements, but
you need to give more info in terms of what you are actually doing and how you define irrelevant portions of returns - what is the benchmark, what is the market - it sounds like you are looking for the proverbial free lunch of risk free arbs, OR are doing the relative strength trade - buying a stock or stocks, hedging with an index to take out the market risk.
Are you trying to take out market risk on an individual stock, take out interest rate risk, minimise volatility, do a texas hedge on a portfolio of small caps stocks...etc; etc;
There are plenty of hedges out there - but it depends on how your tracking is.

[silentdud]

For example:
Short Stock, 10,000/stockprice = shares with a market beta of 1.3
therefore take an offsetting long position in SPY to compensate for beta... (10,000*1.3)/SPY Price

However, when using a multi factor: beta market = 1.27
beta SML = -.3..... , etc.

Short stock 10,0000
Buy long SPY like above, but how to compensate for other betas?... what else to buy/short?

Also has anyone played with using GARCH for fama french four factors??? what sort of time period do you use to estimate beta in these???


I also found this while I was looking around writing this, which may give me some of the size and style options what I can use:
Fama-French Factor Loadings for Popular ETFs » The Calculating Investor