Composite builder
Any single anomaly spends years underwater. But because they don’t all struggle at the same time, a basket of them is far smoother than its parts — the classic “diversification is the only free lunch” result, applied to factors instead of stocks. Build a mix and compare its Sharpe ratio to the average of the individual Sharpes.
4 anomalies, equal weight. Growth of $1, gross of costs.
$1 in the long-short strategy, gross of costs.
| Value (B/M) | 25% | Sharpe 0.35 |
| Momentum | 25% | Sharpe 0.50 |
| Profitability | 25% | Sharpe 0.39 |
| BAB (AQR) | 25% | Sharpe 0.80 |
| Model | Alpha/yr | t | R² |
|---|---|---|---|
| FF 5-factor | +3.5% | 5.4 | 0.46 |
| FF5 + momentum | +0.9% | 2.2 | 0.86 |
A composite of established factors mostly is the factor model, so the alpha here is usually small — the point is the Sharpe, not free money.