Portfolio Construction Framework
Translating alpha signals and risk models into actual portfolio positions requires careful optimization and rebalancing decisions.
Key Topics
Architecture
Design choices between unified vs per-portfolio signal estimation, and single-book vs multi-book approaches.
Optimization
Mean-variance optimization with constraints, including factor neutrality, position limits, and turnover penalties.
Rebalancing
When and how often to rebalance, accounting for transaction costs and signal decay.
Transaction Costs
Modeling and minimizing costs including spreads, market impact, and financing.
Core Principles
- Cost awareness - Transaction costs matter more than small alpha improvements
- Simplicity - Complex optimizers often underperform simple approaches
- Robustness - Optimization should degrade gracefully with estimation error
- Flexibility - Easy to adjust for different mandates and constraints
Design Decisions
The key architectural choice: unified signal estimation with per-portfolio optimization.
This approach:
- Estimates all signals once on the full universe
- Maximizes statistical power
- Allows each portfolio to optimize with its own constraints
- Maintains consistency across strategies