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Hi everyone,
Today, we are excited to showcase the new Alpha Streams Portfolio Optimization notebook. This notebook demonstrates how we can strategically allocate among a collection of alphas each month in order to maximize the Sortino ratio of the portfolio. The notebook shows that by using the optimization, we can create a portfolio that outperforms all of the individual alphas within the portfolio in terms of raw return.
With the live equity curves of the alphas now freely available in the Alpha Market, everyone can use this notebook for analyzing alphas. For a walkthrough of how it works, we've prepared this quick video. The notebook is attached below.
Best,
Derek Melchin
Vladimir
Derek Melchin,
Very nice notebook.
I wonder if there is a way to use it with backtests.
It would also be nice to see a heatmap of the correlation of the daily returns of the constituents.
Adding other dynamic or static weighting methods (inverse variance, equal weighted, etc.) will make it even better.
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Derek Melchin
Hi Vladimir,
It's not yet possible to trade the alphas in a backtest. However, we are working on adding functionality to algorithmically place bids and license alphas from the Alpha Market. We look forward to sharing it with the community.
More weighting methods is a great addition to the notebook. To do so, users just need to redefine the `optimize_allocations` method in the calculations.py file.
Best,
Derek Melchin
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Karthik Kailash
Derek Melchin this is pretty cool, couple questions.
Why do you map the Sortino value onto a sigmoid curve?
How will performance look as the number of alphas increases? Is there a way to speed up or run the optimization in parallel?
Derek Melchin
Hi Karthik,
We mapped the Sortino values onto a sigmoid curve because the raw factor values don't have a defined range. With the Sortino factor being calculated over a lookback window spanning only 45 days instead of a few years, the values can vary quite significantly. A sigmoidal curve was chosen as it would result in aggressive dampening of extreme values. This way, outliers could generate valid fitness function scores. For further information, refer to the Alpha Stream Scoring Criteria notebook.
As the number of alphas increases, the performance of the optimizer should increase but it will take longer to find the optimal weights. We haven't looked into running the optimization process in parallel yet, although it might be possible with the Dask library.
Best,
Derek Melchin
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Mark Reeve
Hi Derek,
Is it possible for individual investors to implement this strategy? Can someone with say a $100,000 USD account trade licensed alpha's?Â
Regards,
Mark
Derek Melchin
Hi Mark,
It's not currently possible to trade alphas with the notebook, but we are working on adding the functionality. For the time being, users can use the latest portfolio weights produced by the notebook to determine the current allocations for their licensed alphas.
Best,
Derek Melchin
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
Quant Stratege
Hi Derek,
I get this error message when running the notebook :
Varad Kabade
Hi Quant Stratege,
We tried reproducing the issue, but the notebook runs without an error. We recommend trying again to check if it is fine now.
Best,
Varad Kabade
Derek Melchin
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.
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