A multi-factor market-neutral investment strategy for New York Stock Exchange equities

TL;DR

This paper develops a systematic, multi-factor, market-neutral investment strategy for NYSE equities that combines various indicators and portfolio construction methods to achieve steady returns and reduce market correlation.

Contribution

It introduces a robust multi-factor approach integrating momentum, fundamentals, and analyst data, with a focus on risk parity portfolio construction for improved performance.

Findings

Risk parity outperforms other methods in Sharpe ratio

Risk parity achieves lower beta and smaller maximum drawdown

Strategy maintains market neutrality and steady returns

Abstract

This report presents a systematic market-neutral, multi-factor investment strategy for New York Stock Exchange equities with the objective of delivering steady returns while minimizing correlation with the market. A robust feature set is integrated combining momentum-based indicators, fundamental factors, and analyst recommendations. Using various statistical tests for feature selection, the strategy identifies key drivers of equity performance and ranks stocks to build a balanced portfolio of long and short positions. Portfolio construction methods, including equally weighted, risk parity, and minimum variance beta-neutral approaches, were evaluated through rigorous backtesting. Risk parity demonstrated superior performance with a higher Sharpe ratio, lower beta, and smaller maximum drawdown compared to the Standard and Poor's 500 index. Risk parity's market neutrality, combined with its ability to maintain steady returns and mitigate large drawdowns, makes it a suitable approach for managing significant capital in equity markets.