How to create the cheapest market-neutral portfolio? by Artemiusgreat

Artemiusgreat INVESTOR

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I'd like to create some market-neurtal portfolio that always stays flat, e.g. buy VOO sell SPY.

Disadvantages

shorting stock involves paying dividends - https://www.google.com/search?q=do+i+pay+dividends+if+I+short+stock
borrowing shares may be expensive - https://www.google.com/search?q=cost+of+shorting+the+stock

Another way of doing it is to use proportions of opposite stocks, e.g. long SPY long VXX, but this portfolio may fluctuate significantly and is not exactly market-neutral.

How to create a combination of stocks bouncing around 0 and at the same time make sure that I don't overpay for it?

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Artemiusgreat

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Adam W

3.8k ,

One way would be to do regularly rebalancing in the Risk Model based on historical beta to the market:

class MyRiskModel(RiskManagementModel):

    def Initialize(self, lookback=30):

        self.lookback = lookback  # Historical lookback period for finding beta

        self.betaThreshold = betaThreshold  # Some small threshold for market neutrality



    def ManageRisk(self, algorithm, targets):

        

        # Currently invested securities

        currInvested = [x.Symbol for x in algorithm.Portfolio.Values if x.Invested]



        # Compute current beta of portfolio (see Sharpe (1964), statsmodels.OLS, etc)

        portfolioBeta = #



        if abs(portfolioBeta) > betaThreshold:



            # Historical SPY / whatever "market"-benchmark

            historicalSPY = algorithm.History('SPY', timedelta(days=self.lookback)

            

            portfolioValue = algorithm.Portfolio.TotalHoldingsValue

            for symbol in currInvested:

                # Compute individual asset betas



                # Get portfolio weights by

                weight = abs(algorithm.Portfolio[symbol].Quantity) * 

                         algorithm.Securities[symbol].Close /

                         algorithm.Portfolio.TotalHoldingsValue



                # Store beta/weights by symbol in a dict/list/etc

 

            # Constrain asset weights until the expected portfolio beta is 0



            return # new constrained weights

Finding the "cheapest" is a bit more tricky and depends on the brokerage. Borrowing costs aren't modeled in yet and can make a big difference for strategies like this depending on the brokerage, but you can look into creating your own borrowing cost model specific to your brokerage.

Shile Wen

63.5k ,

Hi Artemiusgreat,

The easiest way to achieve this type of portfolio would be to long and short equal amounts of SPY (SPDR Services SPX) and VOO (Vanguard SPX), respectively. I’ve shown how to do this in the attached backtest.

Best,
Shile Wen

Artemiusgreat INVESTOR

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