Factor Investing and Long/Short Equity › Key Parameters
Michael BrenndoerferDecember 29, 20251 min read
Quantitative FinanceAll chapters Part 11 of 15Quantitative Trading Strategies
Factor Investing and Long/Short Equity › Key ParametersOne section · Sections in this chapter9 / 12 ↓
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The key parameters for the multi-factor strategy are critical levers that determine strategy behavior and risk characteristics:
- factors: List of characteristic variables used for scoring (e.g., 'book_to_price', 'momentum_12m'). The choice of factors determines what sources of return the strategy attempts to capture.
- factor_weights: Vector determining the importance of each factor in the composite signal. These weights reflect beliefs about factor premia and can be set heuristically or optimized.
- gross_exposure: The sum of long and short absolute weights, determining leverage (typically > 1.0). Higher gross exposure amplifies returns but also amplifies risk.
- net_exposure: The difference between long and short weights, determining market directionality. A net exposure of zero creates a market-neutral portfolio.
- max_position: Constraint on the maximum weight of any single stock to ensure diversification. Lower limits create more diversified portfolios but may dilute factor exposure.
- sector_neutral: Boolean flag indicating whether to enforce zero net exposure within each sector. Sector neutralization isolates pure factor returns from sector effects.