How Long Before L/S PA Results are Impressive?
To learn more about the markets side of things, I created a L/S beta neutral strategy (mostly pair trades with different FX exposure, exposure to rates (NII) for banks, etc.). It has generated a small of alpha so far (3%), and I am feeling great about the strategy. How long should pass before I assume that the results are due to the strategy and not luck?
Edit for more info: volatility is around 50% of underlying index which is SPX. I implemented the strategy around 3 months ago. Currently I'm thinking the one year mark is going to be the cutoff. Results over a year, if consistent, I would attribute to the strategy compared to results less than a year where it's difficult to tell the noise from the true alpha from the strategy.
I originally started this just to learn more about markets since I'm not very knowledgeable about that, let me know if you have any advice on metrics to track for L/S or things to look out for.
3% on what, LMV Or GMV? What has been the volatility of returns.
what time frame are you talking? I am imagining you meaning months or a year. If it’s been 5+ years across a variety of regimes, then you may have something. But if much shorter, it could be luck. Hard to say without more info.
Sorry, I should have been more clear.
3% alpha (GMV) over a period of 3 months. Volatility is around 50% of the underlying index - SPX.
I am thinking if it yields similar results for over a year then it's more a factor of the strategy and less of luck, and results under a year it's going to be too difficult to tell the noise from the strategy based return.
I'm not super knowledgeable about markets or trading, really using this as an opportunity to learn more and just stay engaged with capital markets.
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