Abstract
This paper presents a quantitative investment strategy that is capable of producing strong risk-adjusted returns in both up and down markets. The strategy combines mean reversion and momentum investment strategies to construct a diversified statistical arbitrage approach. The mean reversion strategy decomposes stock returns into market and idiosyncratic return components using principal component analysis. The momentum strategy uses technical trading rules to trade momentum at the industry sector level. Dynamic portfolio optimization is utilized to rebalance exposures as the market environment evolves. The combined strategy was able to generate strong risk-adjusted returns in 2008 as the market declined, and in 2009 as the market rallied. The strategy has proven to be robust across two very different market environments in 2008 and 2009.
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