I'm curious about how risk factor constraints are implemented for discretionary L/S equity teams at multi-manager hedge funds (e.g. Citadel or Millenium). In particular:
1. What factors is the portfolio required to be neutral to? Where is the line drawn (e.g. I'm assuming value/size exposure is not okay, but what about quality, low vol, etc.)?
2. What does the constraint look like? Are there daily/weekly/monthly exposure limits, and if so of what size? Are these hard constraints, or is there some penalty charged for exposure?
3. Are the constraints ex-ante or ex-post? Are you penalized if you meet the platform's defined neutrality constraints at the time of the trade, but the actual portfolio ends up having correlation to the factor?
Thanks in advance.
Beta, momentum, size, value are the conventional ones.
Not sure what is the standard at other places. At my MM, these are usually soft constraints, and reviewed periodically (monthly, quarterly) by the risk department. Short term breaching the constraints is usually fine (days - a week), but having steady net exposure gets you flagged and a visit from the risk guys.
Do funds provide some kind of risk management system to PMs, so they can see their risk exposure in real time? Or they have to set up something to calculate by themselves?
How is value defined, price/book?
Thanks that is helpful
look at barra / axioma.
https://www.msci.com/factor-indexes
Is there anything used beyond these six? Barra has a few dozen but I'm curious how many constraints actually make their way into practice.
There’s technically hundreds of factors but they can be generalized into the top few.
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