Hedging Factor and Systematic Risk
Hey guys, a few of my college friends and I have been trading our own capital and seeing where it goes. Our general portfolio breakdown is 90-95% long equity positions and the remaining is options spreads, opportunistic option trades, and a stat arb strat we are hoping to take live. I'm more into the risk/portfolio management side and it's been exciting to constantly learn and apply techniques to optimize our risk/return profile.
I've been trying to combine a beta- and factor-neutral approach and was wondering if the far more experienced folks on this forum could provide some insight. In general, in our equity positions we are 50/50 long value and long growth and we try to get momentum exposure through our systematic and options strategies. Although this is rudimentary and I do not have access to many advanced tools besides IBKR's options and portfolio analytics (if that is even advanced), my thinking is that because our stat arb/options strategies are more volatile, more convex, and have more transaction costs, giving lower weightage to them can net out our factor exposure. In terms of beta neutrality, we aren't quite beta neutral but we try our best to stay away from cyclical/high beta stocks and put on low beta positions with more idiosyncratic risk to harvest alpha and reduce systematic risk exposure, like commodity stocks.
I apologize if this is a bit garbled but I would greatly appreciate it if y'all could pick holes in my approach and provide some insight, thank you.
I mean how are you hedging out anything if you're not shorting and net is almost 100%?
We are long-only so we only take on short positions through puts in our allocated capital for those positions, I am more concerned with factor and beta risk.
Being long only and beta neutral is like being tall and short at the same time. Make it make sense. Do you have a few pits here and there or is the delta of your puts equating you your book being market neutral. Long only and long equities plus long enough puts to be market neutral are two very different things.
Lmao you can't hedge systematic risk. It's non-diversifiable risk, by definition. Did you take Finance 101? Avoiding systematic risk means not investing altogether
You can hedge systematic risk e.g. you can buy individual stocks and sell S&P 500 therefore isolating the factor and idiosyncratic risk of those stocks.
Oh yea. I take that back. Got a bit semantic, sorry
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