Closed on 09/21/10. See final comments below.
While we (hopefully) await the arrival of shorting and market-neutral strategy simulation, an interim solution that would be highly beneficial (and easier to implement) would be to simulate the effect of running a portfolio hedged against an index.

My idea is that you would have (say) a long portfolio consisting only of stocks from the Russell 2000, then sell R2000 index futures sufficient to reduce your net market exposure to zero.

Such a portfolio would have lower returns than an unhedged portfolio, but equally it would suffere considerably reduced drawdowns. It would be nice to evaluate the statistics of such portfolios.

Since index futures are available for the S&P500 and R2000, they would seem like the best indicies to use a potential hedges. (Though given the choice I would suggest the S&P500 is a poor choice - its heavy weighting towards large/mega caps means that it is somewhat low beta than an equally weighted portfolio of stocks covering a range of market capitalisations.)

I would hope that such a such a simulation option would be considerably less difficult to implement vs. a full long-short portfolio, but deliver the benefits of a market neutral portfolio.
Results: Total score: 27 , # of Votes: 8 , Average: 3.4
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Final Comments
This is now available
Requested by: olikea
On date: 06/08/08
Category: Simulation