Lecture 38

# Example: Long-Short Equity Algorithm

## Introduction

This is our flagship template that demonstrates how to use our Optimize API to trade a cross sectional equity factor. These types of strategies are typically quite robust and, if you've researched the factor model rigorously, statistically sound due to the number of bets they make.

## Prerequisites

```"""
This algorithm demonstrates the concept of long-short equity. It uses a
combination of factors to construct a ranking of securities in a liquid
tradable universe. It then goes long on the highest-ranked securities and short
on the lowest-ranked securities.

For information on long-short equity strategies, please see the corresponding
lecture on our lectures page:

https://www.quantopian.com/lectures

This algorithm was developed as part of Quantopian's Lecture Series. Please
direct and questions, feedback, or corrections to [email protected]
"""

import quantopian.algorithm as algo
import quantopian.optimize as opt
from quantopian.pipeline import Pipeline
from quantopian.pipeline.factors import SimpleMovingAverage

from quantopian.pipeline.data.psychsignal import stocktwits
from quantopian.pipeline.data import Fundamentals

# Constraint Parameters
MAX_GROSS_LEVERAGE = 1.0
TOTAL_POSITIONS = 600

# Here we define the maximum position size that can be held for any
# given stock. If you have a different idea of what these maximum
# sizes should be, feel free to change them. Keep in mind that the
# optimizer needs some leeway in order to operate. Namely, if your
# maximum is too small, the optimizer may be overly-constrained.
MAX_SHORT_POSITION_SIZE = 1.0 / TOTAL_POSITIONS
MAX_LONG_POSITION_SIZE = 1.0 / TOTAL_POSITIONS

def initialize(context):
"""
A core function called automatically once at the beginning of a backtest.

Use this function for initializing state or other bookkeeping.

Parameters
----------
context : AlgorithmContext
An object that can be used to store state that you want to maintain in
your algorithm. context is automatically passed to initialize,
before_trading_start, handle_data, and any functions run via schedule_function.
context provides the portfolio attribute, which can be used to retrieve information
"""

algo.attach_pipeline(make_pipeline(), 'long_short_equity_template')

# Attach the pipeline for the risk model factors that we
# want to neutralize in the optimization step. The 'risk_factors' string is
# used to retrieve the output of the pipeline in before_trading_start below.

# Schedule our rebalance function
algo.schedule_function(func=rebalance,
date_rule=algo.date_rules.week_start(),
time_rule=algo.time_rules.market_open(hours=0, minutes=30),
half_days=True)

# Record our portfolio variables at the end of day
algo.schedule_function(func=record_vars,
date_rule=algo.date_rules.every_day(),
time_rule=algo.time_rules.market_close(),
half_days=True)

def make_pipeline():
"""
A function that creates and returns our pipeline.

We break this piece of logic out into its own function to make it easier to
test and modify in isolation. In particular, this function can be
copy/pasted into research and run by itself.

Returns
-------
pipe : Pipeline
Represents computation we would like to perform on the assets that make
it through the pipeline screen.
"""
# The factors we create here are based on fundamentals data and a moving
# average of sentiment data
value = Fundamentals.ebit.latest / Fundamentals.enterprise_value.latest
quality = Fundamentals.roe.latest
sentiment_score = SimpleMovingAverage(
inputs=[stocktwits.bull_minus_bear],
window_length=3,
)

# We winsorize our factor values in order to lessen the impact of outliers
# https://en.wikipedia.org/wiki/Winsorizing
value_winsorized = value.winsorize(min_percentile=0.05, max_percentile=0.95)
quality_winsorized = quality.winsorize(min_percentile=0.05, max_percentile=0.95)
sentiment_score_winsorized = sentiment_score.winsorize(
min_percentile=0.05,
max_percentile=0.95
)

# Here we combine our winsorized factors, z-scoring them to equalize their influence
combined_factor = (
value_winsorized.zscore() +
quality_winsorized.zscore() +
sentiment_score_winsorized.zscore()
)

# Build Filters representing the top and bottom baskets of stocks by our
# combined ranking system. We'll use these as our tradeable universe each
# day.

# The final output of our pipeline should only include
# the top/bottom 300 stocks by our criteria
long_short_screen = (longs | shorts)

# Create pipeline
pipe = Pipeline(
columns={
'longs': longs,
'shorts': shorts,
'combined_factor': combined_factor
},
screen=long_short_screen
)
return pipe

"""
Optional core function called automatically before the open of each market day.

Parameters
----------
context : AlgorithmContext
See description above.
data : BarData
An object that provides methods to get price and volume data, check
whether a security exists, and check the last time a security traded.
"""
# Call algo.pipeline_output to get the output
# Note: this is a dataframe where the index is the SIDs for all
# securities to pass my screen and the columns are the factors
# added to the pipeline object above
context.pipeline_data = algo.pipeline_output('long_short_equity_template')

def record_vars(context, data):
"""
A function scheduled to run every day at market close in order to record
strategy information.

Parameters
----------
context : AlgorithmContext
See description above.
data : BarData
See description above.
"""
# Plot the number of positions over time.
algo.record(num_positions=len(context.portfolio.positions))

# Called at the start of every month in order to rebalance
# the longs and shorts lists
def rebalance(context, data):
"""
A function scheduled to run once every Monday at 10AM ET in order to
rebalance the longs and shorts lists.

Parameters
----------
context : AlgorithmContext
See description above.
data : BarData
See description above.
"""
# Retrieve pipeline output
pipeline_data = context.pipeline_data

# Here we define our objective for the Optimize API. We have
# selected MaximizeAlpha because we believe our combined factor
# ranking to be proportional to expected returns. This routine
# will optimize the expected return of our algorithm, going
# long on the highest expected return and short on the lowest.
objective = opt.MaximizeAlpha(pipeline_data.combined_factor)

# Define the list of constraints
constraints = []
# Constrain our maximum gross leverage
constraints.append(opt.MaxGrossExposure(MAX_GROSS_LEVERAGE))

# Require our algorithm to remain dollar neutral
constraints.append(opt.DollarNeutral())

# Add the RiskModelExposure constraint to make use of the
# default risk model constraints
neutralize_risk_factors = opt.experimental.RiskModelExposure(
version=0
)
constraints.append(neutralize_risk_factors)

# With this constraint we enforce that no position can make up
# greater than MAX_SHORT_POSITION_SIZE on the short side and
# no greater than MAX_LONG_POSITION_SIZE on the long side. This
# ensures that we do not overly concentrate our portfolio in
# one security or a small subset of securities.
constraints.append(
opt.PositionConcentration.with_equal_bounds(
min=-MAX_SHORT_POSITION_SIZE,
max=MAX_LONG_POSITION_SIZE
))

# Put together all the pieces we defined above by passing
# them into the algo.order_optimal_portfolio function. This handles
# all of our ordering logic, assigning appropriate weights
# to the securities in our universe to maximize our alpha with
# respect to the given constraints.
algo.order_optimal_portfolio(
objective=objective,
constraints=constraints
)
```

The lectures on this website are provided for informational purposes only and do not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor do they constitute an offer to provide investment advisory services by Quantopian.

In addition, the lectures offer no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.