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14 sharpe, mostly cash strategy

2005-2011 shown here, but it is consistent over any period I've tested. This is without transactional costs applied.

This strategy was the result of completely misunderstanding something I read on ssrn. It turns out the strategy I was trying to recreate was something else entirely, but I think I came across something better.

It enters positions only during a brief window and sits in cash most of the day. Unfortunately, due to the high turnover this strategy does not survive Q's slippage model. So it's likely untradable.

The strategy is purely technical. Unfortunately, it's only predictive over this short intraday time frame. Hold positions for longer and all the alpha disappears. So I'm not sure if there's anything I can do with this.

It is remarkable how consistent the alpha is though. It's remarkable to me that every single day there are market participants on the wrong side of this trade. Every day the same fairly significant mispricing occurs, and every day some poor schmucks pay the wrong prices for these assets--cumulatively negative 0.5 annualized alpha!--and that's on top of frictional costs. Ouch!

[Trades only stocks in the QTradableStocksUS universe. Does not exploit the well-known limit order bug. Uses the order optimizer. Leverage is consistently at or under 1.0]

4 responses

That's insanely high indeed. can you tell more about this anomaly? Can you maybe use these signals to do something sector wise (so clump the trabnsacgtions costs into one transaction?

As is it's entirely hedged -- 0 net sector exposures. So that helps keep the volatility down so much.

I did make a version with ETFs, and the peculiar thing is that the signal inverts! I can't explain why that would be. Quite a bit more volatility though, and only modest gains with a giant pop during 2008. Not worth trading.

Interesting... Would love to hear a bit more about it. Which paper were you initially intending to replicate?

It's so simple that I'm afraid if I say it'll give the whole thing away.