Finding Alphas. Igor Tulchinsky

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      Finding Alphas

      FINDING ALPHAS

      A QUANTITATIVE APPROACH TO BUILDING TRADING STRATEGIES

      Igor Tulchinsky et al.

      WorldQuant Virtual Research Center

      This edition first published 2015

      © 2015 Igor Tulchinsky et al., WorldQuant Virtual Research Center

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      ISBN 978-1-119-05786-4 (hbk) ISBN 978-1-119-05788-8 (ebk)

      ISBN 978-1-119-05789-5 (ebk) ISBN 978-1-119-05787-1 (ebk)

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Dedicated to All at WorldQuant – The Future of Trading

      Preface

      This book is a study of the process of finding alphas. The material is presented as a collection of essays, providing diverse viewpoints from successful quants on the front lines of quantitative trading.

      A wide variety of topics is covered, ranging from theories about the existence of alphas, to the more concrete and technical aspects of alpha creation.

      Part I presents a general introduction to alpha creation, and is followed by a brief account of the alpha life-cycle, and insights on cutting losses.

      Part II focuses more on the technical side of alpha design, such as the dos and don'ts of information research, key steps to developing an alpha, and the evaluation and improvement of quality alphas. The key technical aspects discussed in this section are turnover, backtesting, fundamental analysis, equity price volume, statistical arbitrage, overfitting, and alpha diversity.

      Part III explores ad hoc topics in alpha design, including alpha design for various asset classes like futures and currencies, the development of momentum alphas, and the effect of news and social media on stock returns.

      In Part IV, we introduce you to WebSim™, a web-based alpha development tool. We invite all quant enthusiasts to utilize this free tool to learn about alpha backtesting (also known as alpha simulation), and ultimately to create their own alphas.

      Finally, in Part V, we present an inspirational essay for all quants who are ready to explore the world of quantitative trading.

      Acknowledgments

      In these pages, we present readers with a collection of writings on the alchemic art of finding alphas. It is written by WorldQuant's founder, directors, managers, in-house portfolio managers, and quantitative researchers. The key objectives of this collection are twofold – to present many viewpoints as to how to define an alpha, and how to find one. At WorldQuant, we believe no viewpoint is the best and only answer, and that a variety of approaches is always superior to a single one. We also present our online financial markets simulation tool known as WebSim™, which lets users and consultants create, test, simulate, and track alphas.

      WorldQuant would like to thank Rohit Agarwal, Ionut Aron, Pankaj Bakliwal, Scott Bender, Hongzhi Chen, Benjamin Ee, Zhuangxi Fang, Paul A. Griffin, Yongfeng He, Richard Hu, Yu Huang, Hammad Khan, Michael Kozlov, Geoffrey Lauprete, Cong Li, Weijia Li, Zhiyu Ma, Sunny Mahajan, Pratik Patel, Kailin Qi, Jeffrey Scott, Xinye Tang, Swastik Tiwari, Igor Tulchinsky, Peng Wan, Richard Williams, Peng Yan, and Wancheng Zhang for their contributions, polishing efforts, and time invested in making this book a reality.

      A special note of thanks to Wendy Goldman Rohm, our literary agent, for her critical and insightful comments on early drafts, her awesome proofing, and many great suggestions throughout the project; and to Werner Coetzee and the teams at John Wiley and Sons for their expert guidance and detailed and helpful advice. Many thanks also to Jeffrey Blomberg and Kristin Chach, WorldQuant's most dedicated legal team, for their wise counsel and tireless work to keep us on the track and guide us beyond. And thanks to Tracy Tseung for her timely project management and editorial assistance.

      Finally, we would like to acknowledge with gratitude the support and faith of every colleague at WorldQuant. Thank you all.

DISCLAIMER

      The contents of this book are intended for informational and educational purposes only and, as such, are not intended to be nor should be construed in any manner to be investment advice. The views expressed are those of the various contributors and do not necessarily reflect the view or opinion of WorldQuant or WorldQuant Virtual Research Center.

      About the WebSim™ Website

      At the time of writing, the WebSim™ information contained in this document is consistent with the WebSim™ website. Since the website is subject to change, in cases where there exist inconsistencies between this document and the website, the terms of the WebSim™ website will govern the most updated and current processes of WebSim™. For the most up-to-date version of WebSim™ and the terms applicable to use of WebSim™, please go to https://websim.worldquantchallenge.com or its successor site.

      Registration at WebSim's™ official website is required to obtain the full functionality of the tool, and to have access to the WebSim™ support team. Successful alphas may, in certain cases, be considered for inclusion in actual quant trading investment strategies managed by WorldQuant.

      WEBSIM™ RESEARCH CONSULTANTS

      WorldQuant has established a Research Consultant program for qualified individuals to work with our web-based simulation platform, WebSim. This program gives consultants the flexibility to create alphas in their own physical and intellectual