Responding to your points, Grant:
Time scale is another part of the art I would say. I think you would need to do a robust parameter optimization looking at returns vs. trading costs as you varied the rebalancing frequency. David Edwards showed some of these approaches in this webinar as I recall. More frequent rebalancing will eat more transaction costs, but may be more responsive to market changes. As a rule of thumb I think weekly to monthly sounds about right.
Your intuition here is largely right. What it is doing is rather than betting on stocks in M to go up, or stocks in N to go down, you are betting on the predictive quality of your ranking. An equal dollar-volume long-short portfolio will make money based on r_M - r_N, where r_M is the returns of M and r_N is the returns of N. You make money when your ranking successfully predicts for increased returns, regardless of whether r_M and r_N are positive or negative. The spearman correlation lecture has an example of determining the predictive capacity of some ranking scheme.
The profitability of a strategy is determined by excess returns - trading costs. If you had a particularly good ranking scheme or incurred few enough trading costs due to infrequent rebalancing, then you might be able to run a long-short on $100,000. However, I suspect yes by and large most long-short strategies will not be profitable on $100,000. That said, you can submit your algorithm for consideration for the manager's program even if it's not appropriate for the contest. We understand that the contest is far from the be-all and end-all of which algorithms are good, and we are actively looking for algorithms outside those that do well in the contest. We also run contest submissions over larger capital allocations to check for these cases. You can you can always let us know about a strategy you'd like us to consider at [email protected], and we'll definitely take a look.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers 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.