Market Neutral

The firm's Market Neutral Strategy captures consistent absolute returns while maintaining the portfolio's beta close to zero.   By removing the short constraint and maintaining dollar neutral portfolios to long and short securities, the portfolio optimization process identifies efficient portfolios that maximize expected absolute return subject to the client's risk tolerance.  Industry, common factor and company specific risks are all tightly controlled to minimize the probability of unwanted downside risk.

The strategy may be managed for single market portfolios or it may be managed across economic regions to provide additional diversification. For global portfolios, optimizations are run independently within the US, Europe, and Japan where long and short positions are dollar matched within each region. Single market portfolios typically hold 250 long and 250 short positions and individual stock exposures are limited to 1%. For global portfolios, position sizes are limited to 1/2 of 1% bringing the total number of stocks to 600 long and 600 short.

There are several unique aspects to L.A. Capital's Market Neutral Strategy.  First, the opportunity set includes large and small cap stocks in each market. Given the unique characteristics of small cap stocks, the investment process independently estimates investor preferences for small cap investors, enhancing the predictive power of the small cap alpha estimates. For each regional model, approximately 90 factors are priced weekly, providing good diversification and a low level of model risk. For global portfolios, model risk is further reduced as the number of factors approaches 300.

Both the portfolio construction and implementation process are managed dynamically to maintain portfolio efficiency.  The portfolio's risk budget expands slightly when return opportunities improve but contracts as the market conditions become more volatile and the pricing of risk factors becomes less clear.  Implementation costs are aggressively managed through a dynamic trading process as market orders are placed continuously throughout the month to capture the mean reverting short-term price patterns of equities and to minimize market impact costs.