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Factor modeling backtest for New Yorker hedge fund

CLIENT

A New Yorker Hedge Fund.

OPPORTUNITY

The client approached SG Analytics to conduct a strategy definition and back-testing for a proprietary quantitative factor model.

SOLUTION

SG Analytics supported the client’s onshore team by adding experienced offshore resources that conducted the following steps:
  1. Leveraging historical data from January 2005 to December 2016 (backtest period), our team identified key factors based on monthly re-balances of stocks.
  2. The team ranked the stocks based on factor weights and returns to compare the returns of top decile stocks with the returns of bottom decile stocks.
  3. We then conducted an optimization and Monte-Carlo simulation to identify a combination of factors for which the top decile would consistently outperform the bottom decile and maintain a Sharpe ratio > 1 throughout the back-test period from 2005 to December 2016.

VALUE DELIVERED

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1
SG Analytics' backtest demonstrated that the top decile outperformed the bottom decile with an average monthly return of 2.48% and an annualized Sharpe ratio of 1.13
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2
A long-short fund using the two deciles with equal dollar values would have yielded average annualized returns of 36% and Sharpe ratios of 1.67 with all 12 years yielding positive returns.
 

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