Market-Neutral Strategies in Mid-Cap Portfolio Management: A Data-Driven Approach to Long-Short Equity

TL;DR

This paper presents a data-driven long-short equity strategy for mid-cap stocks, achieving high risk-adjusted returns and demonstrating stability across different market conditions.

Contribution

It introduces a novel mid-cap focused long-short approach with enhanced portfolio optimization and reproducibility, filling a gap in existing research.

Findings

Achieved a Sharpe ratio of 2.132 in test data

Strategy remains stable across various market conditions

Highlights mid-cap stocks as an attractive investment opportunity

Abstract

Mid-cap companies, generally valued between \$2 billion and \$10 billion, provide investors with a well-rounded opportunity between the fluctuation of small-cap stocks and the stability of large-cap stocks. This research builds upon the long-short equity approach (e.g., Michaud, 2018; Dimitriu, Alexander, 2002) customized for mid-cap equities, providing steady risk-adjusted returns yielding a significant Sharpe ratio of 2.132 in test data. Using data from 2013 to 2023, obtained from WRDS and following point-in-time (PIT) compliance, the approach guarantees clarity and reproducibility. Elements of essential financial indicators, such as profitability, valuation, and liquidity, were designed to improve portfolio optimization. Testing historical data across various markets conditions illustrates the stability and resilience of the tactic. This study highlights mid-cap stocks as an attractive investment route, overlooked by most analysts, which combine transparency with superior performance in managing portfolios.