Factor investing works when implementation is disciplined. We discuss how to combine signals, control turnover, manage risk and validate models so production portfolios are robust to noise and regime change.
Signal combination
- Standardize alphas to a common scale and horizon.
- Penalize unstable signals; shrink to simple baselines.
- Use diversification: decorrelate via cross‑sectional orthogonalization.
Portfolio construction
- Risk model with sector/industry and style factors.
- Constraints: gross/net, position, turnover and liquidity.
- Objective: information ratio with cost‑aware regularization.
Turnover control
Apply trading frictions directly in optimization, prefer partial rebalances, impose no‑trade bands and use signal smoothing to avoid churn that erodes alpha.
Validation
- Purged, embargoed cross‑validation to avoid leakage.
- Stress tests across regimes and liquidity conditions.
- Attribution and hypothesis‑driven diagnostics to keep models honest.