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How to combine a billion alphas

Author

Listed:
  • Zura Kakushadze

    (QuantigicR Solutions LLC
    Free University of Tbilisi)

  • Willie Yu

    (Centre for Computational Biology)

Abstract

We give an explicit algorithm and source code for computing optimal weights for combining a large number N of alphas. This algorithm does not cost $${\mathcal {O}}(N^3)$$ O ( N 3 ) or even $${\mathcal {O}}(N^2)$$ O ( N 2 ) operations but is much cheaper, in fact, the number of required operations scales linearly with N. We discuss how in the absence of binary or quasi-binary “clustering” of alphas, which is not observed in practice, the optimization problem simplifies when N is large. Our algorithm does not require computing principal components or inverting large matrices, nor does it require iterations. The number of risk factors it employs, which typically is limited by the number of historical observations, can be sizably enlarged via using position data for the underlying tradables.

Suggested Citation

  • Zura Kakushadze & Willie Yu, 2017. "How to combine a billion alphas," Journal of Asset Management, Palgrave Macmillan, vol. 18(1), pages 64-80, January.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:1:d:10.1057_s41260-016-0004-9
    DOI: 10.1057/s41260-016-0004-9
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    References listed on IDEAS

    as
    1. Zura Kakushadze, 2015. "Combining Alphas via Bounded Regression," Risks, MDPI, vol. 3(4), pages 1-17, November.
    2. Zura Kakushadze, 2016. "Shrinkage=factor model," Journal of Asset Management, Palgrave Macmillan, vol. 17(2), pages 69-72, March.
    3. Zura Kakushadze, 2015. "Combining Alphas via Bounded Regression," Papers 1501.05381, arXiv.org, revised Oct 2015.
    4. Zura Kakushadze, 2014. "Combining Alpha Streams with Costs," Papers 1405.4716, arXiv.org, revised Jan 2015.
    5. Zura Kakushadze, 2014. "Factor Models for Alpha Streams," Papers 1406.3396, arXiv.org, revised Oct 2014.
    6. Zura Kakushadze & Willie Yu, 2016. "Multifactor Risk Models and Heterotic CAPM," Papers 1602.04902, arXiv.org, revised Mar 2016.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Zura Kakushadze & Willie Yu, 2018. "Decoding stock market with quant alphas," Journal of Asset Management, Palgrave Macmillan, vol. 19(1), pages 38-48, January.
    2. Zura Kakushadze, 2020. "Quant Bust 2020," Papers 2006.05632, arXiv.org.
    3. Zura Kakushadze & Willie Yu, 2017. "*K-means and Cluster Models for Cancer Signatures," Papers 1703.00703, arXiv.org, revised Jul 2017.
    4. Zura Kakushadze & Willie Yu, 2018. "Dead alphas as risk factors," Journal of Asset Management, Palgrave Macmillan, vol. 19(2), pages 110-115, March.

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