Fractal Optimization of Market Neutral Portfolio

Sergey Kamenshchikov and Ilia Drozdov

Papers from arXiv.org

Abstract: A fractal approach to the long-short portfolio optimization is proposed. The algorithmic system based on the composition of market-neutral spreads into a single entity was considered. The core of the optimization scheme is a fractal walk model of returns, optimizing a risk aversion according to the investment horizon. The covariance matrix of spread returns has been used for the optimization and modified according to the Hurst stability analysis. Out-of-sample performance data has been represented for the space of exchange traded funds in five period time period of observation. The considered portfolio system has turned out to be statistically more stable than a passive investment into benchmark with higher risk adjusted cumulative return over the observed period.

Date: 2016-12, Revised 2016-12
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