FACTOR-BASED PORTFOLIO MANAGEMENT: CHICAGO QUANTITATIVE ALLIANCE CHALLENGE

Abstract

This paper explains the process used in factor investing to create a portfolio with a 50% long position and a 50% short position. Size, volatility, momentum, quality, and value were all used to rank 1,000 U.S. companies. There was a long position put on the highest-ranking stocks and a short position put on the lowest ranking. This portfolio was used in the Chicago Quantitative Alliance’s investment challenge. The 5-month long competition ended with a portfolio loss of 22.63%. The largest contributors to this loss were a lack of risk controls and a market not in favor of the thesis. The portfolio underwent two different hypotheses. The original thesis was placing a large bet on the fact that the stock market would see a “W-shaped” recovery and would therefore crash in the next few weeks. This thesis was tested for the first 2 months of the competition. With a return of -25.94%, the portfolio was sold and over 100 new securities were purchased based on a new thesis. The new hypothesis was that the market would continue to expand till the end of the competition. While overall returns were positive during the second round, it was not enough to get the team into the final round.