Free strategy

Here we will give you some rough idea of how to be market neutral, trade only once per year and get an 18% annualized performance, when the markets are up 11% per year, for an 8% annualized alpha, based on a study released in 2000 by Stanford Associate Professor of Accounting Joseph Piotroski.

Each year, Professor Piotroski divided all listed companies in book-to-market quintiles and size tercile cutoffs. He formed portfolios based on the firms' aggregate F_SCORE, a measure based on nine fundamental signals chosen to measure three areas of each firm's financial condition: profitability, financial leverage / liquidity and operating efficiency.

Each of these nine signals can have a value of "good" (1) or "bad" (0). The sum of all nine is the F_SCORE, which can be as low as zero and as high as nine.

With an initial investment of $100, suppose that you would bet $100 on a portfolio with only low F_SCORE (zero or one) companies on the short side, and $100 on a portfolio with only high F_SCORE (eight or nine) companies. As a result, you would use a leverage of 2x (available in any margin account) and get a return of 19% per year over the observed period.

From 1976 to 1996 (21 years), you would have had only three down years, versus four for the S&P 500 index and your worst year would have shown a loss of -8% versus -12% for the S&P 500. Less risk, more profit. You just need to get to work every twelve months.

All the details are explained in the study. Sure, even only once per year, it's a lot of work. And we believe that book to market is only one of the things to look at when investing; if you look at other, additional indicators, you can make more money with less risk. This is just an illustration to show you that alpha is available for free for those who put their minds to it.