Notes on Alpha Stream Optimization

The Journal of Investment Strategies 4(3) (2015) 37-81

42 Pages Posted: 6 Jun 2014 Last revised: 26 Jun 2015

See all articles by Zura Kakushadze

Zura Kakushadze

Quantigic Solutions LLC; Free University of Tbilisi

Date Written: March 18, 2015

Abstract

In these notes we discuss investment allocation to multiple alpha streams traded on the same execution platform, including when trades are crossed internally resulting in turnover reduction. We discuss approaches to alpha weight optimization where one maximizes P&L subject to bounds on volatility (or Sharpe ratio). The presence of negative alpha weights, which are allowed when alpha streams are traded on the same execution platform, complicates the optimization problem. By using factor model approach to alpha covariance matrix, the original optimization problem can be viewed as a 1-dimensional root searching problem plus an optimization problem that requires a finite number of iterations. We discuss this approach without costs and with linear costs, and also with nonlinear costs in a certain approximation, which makes the allocation problem tractable without forgoing nonlinear portfolio capacity bound effects.

Keywords: hedge fund, alpha stream, crossing trades, transaction costs, impact, portfolio turnover, investment allocation, weight optimization

JEL Classification: G00

Suggested Citation

Kakushadze, Zura, Notes on Alpha Stream Optimization (March 18, 2015). The Journal of Investment Strategies 4(3) (2015) 37-81. Available at SSRN: https://ssrn.com/abstract=2446328 or http://dx.doi.org/10.2139/ssrn.2446328

Zura Kakushadze (Contact Author)

Quantigic Solutions LLC ( email )

1127 High Ridge Road #135
Stamford, CT 06905
United States
6462210440 (Phone)
6467923264 (Fax)

HOME PAGE: http://www.linkedin.com/in/zurakakushadze

Free University of Tbilisi ( email )

Business School and School of Physics
240, David Agmashenebeli Alley
Tbilisi, 0159
Georgia

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