Hello, everyone.
First, Stittsville123, take a look on your book risk measurements tab. P123 doesn’t show alpha correctly.
For example, your first unhedged port S&P400/600 shows 23 ret 0.83 beta and 2.25 alpha for the trailing 3 years. It can’t be so.
23-0.83*9.31ret for SPY = 15% alpha (assuming zero risk free rate). Refresh book models risk tabs on monthly basis and it will be recalculated properly.
You can achieve alpha through diversification theoretically even combining zero alpha ports. It depends on each model st dev, correlation to the market, pair correlation and model returns. If combined beta decreasing faster than returns you achieve alpha and vice versa.
In other case you can decrease your alpha through diversification even using positive alpha models. It should be calculated case by case.
Then you using market timing rules correctly your beta becomes your alpha.
Bonds or shorts have inherent alpha due to negative beta. That’s why using it in a book brings diversification benefits. Using low correlated models in a book gives the same result. But the problem is that long equity will be positive correlated anyway.
Short tradable system with zero return over 15 years (it means that alpha is a positive number and equal beta*market ret) is possible to make even without market timing. I have attached one simulation and it works as live port now.
Backtested and OOS perfromance should be consistent. In other case it would be good-looking pictures only in R2G section without any practical use. Especially with 5-10 holdings ports. How many of these ports showed consistent OOS taking into account survivorship bias 10% or 5%? Pessimist addition - it can be pure luck, it even should be luck)
The motivation to show good backtested result makes future performance significantly worse.
About my experience and what I want. I’m not a professional trader. My primary focus is private equity deals. But now there is an idea to launch a small hedge fund. P123 is the best place (taking into account price/quality trade-off) to simulate some ideas.