Investment Thesis

A Dual-Stage Universe Selection Process

The essence of our long/short strategy lies in its rigorous selection process that employs both a coarse and fine filtering mechanism, ensuring only the most promising stocks are chosen. Here’s a detailed breakdown of how it works:

1. Coarse Selection (Liquidity and Fundamental Data)

  • The strategy begins by identifying equities with sufficient liquidity and fundamental data to ensure ease of entry and exit. Stocks with a price greater than $5 are considered to filter out low-priced stocks that may pose higher risks.
  • Among the stocks that meet these basic requirements, a further selection is made based on dollar volume, ensuring that only the most liquid and tradable stocks are considered.

2. Fine Selection (Financial Ratios and Composite Scoring)

  • The second phase narrows the selection down further to a top 10 long and bottom 10 short positions. This is done by evaluating stocks based on a composite score calculated from three key factors:
    1. Operating Margin: Identifying companies with high operational efficiency.
    2. One-Month Price Change: Highlighting stocks with recent price momentum.
    3. Book Value per Share: Evaluating companies with strong balance sheets and intrinsic value.

3. Monthly Rebalancing

  • The portfolio is rebalanced every month to adjust holdings and maintain an equal weight between long and short positions. This ensures that the portfolio stays aligned with the evolving market conditions and fundamentals of the selected stocks.

Why Switch to This Strategy?

Given the current macroeconomic landscape—rife with geopolitical instability, inflation concerns, and potential recessions—the long/short equity strategy provides several advantages:

Downside Protection: By holding short positions, we hedge against market declines, which is crucial when facing economic turbulence. This positions us to potentially profit during bear markets or times of sector-specific downturns.

Capitalizing on Market Inefficiencies: Through quantitative ranking and fundamental analysis, the strategy identifies opportunities where stocks are mispriced, whether they are expected to rise or fall, offering us a unique opportunity to benefit from inefficiencies in the market.

Resilience During Volatility: Given the volatility expected in the near future, this strategy is designed to protect the portfolio from sharp market movements while maintaining exposure to opportunities across both growth and value stocks.

Diversification Across Sectors and Geographies: By focusing on a wide universe of stocks across various industries, the strategy helps mitigate risk and ensures diversified exposure. This is particularly important in the context of global uncertainties and shifts in geopolitical dynamics that could affect specific regions or sectors.

Conclusion

In light of the economic and political uncertainties that are likely to persist, the long/short equity strategy represents a prudent shift in our approach. It aligns with our broader goal of maintaining a resilient, diversified portfolio capable of generating returns, regardless of market direction. As a firm deeply committed to value investing and risk management, this strategy not only enhances our ability to adapt but also offers greater flexibility to navigate the complexities of the coming months. We believe it will offer our investors the best potential for both growth and protection in an unpredictable market environment​Investment Thesis​Investment Thesis.

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Quant League Competitions

January 2025