Will​ ​market-neutral​ ​ETF​ ​trading​ ​replace​ ​traditional 

long/short​ ​equity​ ​trading?  
 

Story​ ​of​ ​long/short​ ​equity​ ​trading 

Nunzio​ ​Tartaglia,​ ​Morgan​ ​Stanley’s​ ​Black​ ​Box​ ​and​ ​second​ ​generation​ ​efforts​ ​like​ ​D.E.​ ​Shaw​ ​and 
Peter​ ​Muller’s​ ​PDT​ ​became​ ​Wall​ ​Street​ ​celebrities​ ​with​ ​the​ ​emergence​ ​of​ ​equity​ ​long/short​ ​trading 
in​ ​late​ ​eighties​ ​and​ ​early​ ​nineties.​ ​As​ ​Trend​ ​Following​ ​grew,​ ​so​ ​did​ ​stat/arb​ ​which​ ​was​ ​essentially 
providing​ ​liquidity​ ​to​ ​trend-followers​ ​and​ ​“stock​ ​pickers”.​ ​Traditional​ ​long/short​ ​equity​ ​had​ ​a 
smooth​ ​ride​ ​well​ ​into​ ​2000s.​ ​Till​ ​2003​ ​that​ ​is. 
 
With​ ​decimalization,​ ​Reg-NMS,​ ​and​ ​the​ ​rise​ ​of​ ​High​ ​Frequency​ ​Trading,​ ​the​ ​alpha​ ​in​ ​long-short 
equity​ ​has​ ​all​ ​but​ ​been​ ​eroded.​ ​Since​ ​2004,​ ​the​ ​tides​ ​have​ ​turned.​ ​Long/short​ ​trading​ ​on​ ​ETFs​ ​has 
been​ ​the​ ​top​ ​performing​ ​trade. 
 

 
 
The​ ​image​ ​above​ ​shows​ ​the​ ​trend​ ​in​ ​Sharpe​ ​ratios​ ​of​ ​a​ ​representative​ ​long/short​ ​equity​ ​trading 
strategy​ ​and​ ​similarly​ ​of​ ​a​ ​representative​ ​market-neutral​ ​ETF​ ​trading​ ​strategy.​ ​Based​ ​on​ ​the​ ​data, 
we​ ​feel​ ​that​ ​market/neutral​ ​ETF​ ​trading​ ​should​ ​have​ ​better​ ​returns​ ​than​ ​market-neutral​ ​stocks 
trading​ ​in​ ​future. 

 
 

Allocators’​ ​perspective 
 
We​ ​believe​ ​that​ ​institutional​ ​investors​ ​may​ ​realize​ ​better​ ​returns​ ​when​ ​they​ ​invest​ ​in​ ​ETF​ ​based 
quants​ ​as​ ​opposed​ ​to​ ​quants​ ​who​ ​are​ ​trading​ ​single​ ​stocks.​ ​In​ ​theory,​ ​there​ ​are​ ​a​ ​lot​ ​more 
differences​ ​between​ ​single​ ​stocks​ ​and​ ​the​ ​conventional​ ​notion​ ​is​ ​that​ ​single​ ​stocks​ ​have​ ​a​ ​lot​ ​more 
alpha​ ​to​ ​be​ ​made.​ ​However,​ ​that​ ​is​ ​not​ ​the​ ​case​ ​today.​ ​We​ ​will​ ​show​ ​here​ ​that​ ​a​ ​quant​ ​trading 
ETFs​ ​is​ ​much​ ​more​ ​likely​ ​to​ ​realize​ ​alpha​ ​today.​ ​A​ ​quant-trading​ ​system​ ​that​ ​tries​ ​to​ ​derive​ ​alpha 
from​ ​single​ ​stocks​ ​is​ ​more​ ​risky,​ ​more​ ​costly​ ​and​ ​more​ ​prone​ ​to​ ​overfitting. 
 
Given​ ​the​ ​low​ ​cost,​ ​liquidity,​ ​availability​ ​of​ ​long​ ​historical​ ​data​ ​(either​ ​of​ ​the​ ​ETF​ ​or​ ​that​ ​of​ ​its​ ​index) 
trading​ ​ETFs​ ​and​ ​not​ ​single​ ​stocks​ ​helps​ ​us​ ​remove​ ​any​ ​survivorship​ ​bias​ ​and​ ​allows​ ​for​ ​strategies 
to​ ​be​ ​meaningfully​ ​tested​ ​over​ ​possible​ ​scenarios​ ​of​ ​future​ ​market​ ​events​ ​using​ ​walk-forward 
optimization.​ ​Drivers​ ​of​ ​performance​ ​are​ ​easier​ ​to​ ​identify​ ​and​ ​to​ ​be​ ​controlled,​ ​improved​ ​and 
fine-tuned​ ​for​ ​different​ ​market​ ​views. 

ETFs​ ​cover​ ​a​ ​large​ ​universe​ ​of​ ​stocks 

Broad​ ​based​ ​ETFs​ ​let​ ​investors​ ​gain​ ​exposure​ ​to​ ​a​ ​wide​ ​array​ ​of​ ​stocks.​ ​For​ ​example,​ ​Vanguard’s 
Total​ ​Stock​ ​Market​ ​Index​ ​Fund​ ​covers​ ​more​ ​than​ ​3500​ ​US​ ​stocks,​ ​while​ ​the​ ​Total​ ​World​ ​Stocks 
ETF​ ​covers​ ​close​ ​to​ ​8000​ ​world​ ​stocks​ ​in​ ​over​ ​47​ ​countries.​ ​Such​ ​coverage​ ​is​ ​practically 
impossible​ ​with​ ​individual​ ​stocks.  
It​ ​would​ ​take​ ​many​ ​millions​ ​today​ ​to​ ​build​ ​an​ ​execution​ ​system​ ​that​ ​can​ ​trade​ ​a​ ​similarly​ ​diversified 
set​ ​of​ ​stocks.​ ​Achieving​ ​a​ ​diversified​ ​exposure​ ​in​ ​stocks​ ​would​ ​also​ ​necessitate​ ​a​ ​portfolio​ ​of​ ​at 
least​ ​a​ ​hundred​ ​million​ ​dollars.​ ​Hence​ ​most​ ​long/short​ ​firms​ ​trading​ ​stocks​ ​don’t​ ​support​ ​an​ ​SMA 
structure.​ ​On​ ​the​ ​other​ ​hand,​ ​the​ ​60​ ​or​ ​so​ ​ETFs​ ​in​ ​Qplum’s​ ​flagship​ ​portfolio​[1]​ ​cover​ ​more​ ​than 
16000​ ​stocks​ ​worldwide. 
 

ETFs​ ​allow​ ​us​ ​to​ ​source​ ​alpha​ ​from​ ​other​ ​asset​ ​classes 
While​ ​old-school​ ​long/short​ ​trading​ ​on​ ​stocks​ ​has​ ​been​ ​limited​ ​to​ ​equities,​ ​the​ ​same​ ​on​ ​ETFs 
allows​ ​us​ ​to​ ​cover​ ​virtually​ ​every​ ​asset​ ​class​ ​now.​ ​We​ ​can​ ​try​ ​to​ ​derive​ ​alpha​ ​in​ ​government​ ​bonds, 
real​ ​estate,​ ​commodities,​ ​corporate​ ​bonds,​ ​and​ ​all​ ​of​ ​these​ ​both​ ​domestic​ ​and​ ​international. 
 

ETFs​ ​require​ ​less​ ​operational​ ​effort​ ​than​ ​a​ ​portfolio​ ​of​ ​L/S​ ​stocks 
If​ ​a​ ​data​ ​science​ ​team​ ​like​ ​Qplum​ ​focuses​ ​on​ ​trading​ ​ETFs,​ ​they​ ​will​ ​have​ ​to​ ​handle​ ​a​ ​lot​ ​less 
complexity,​ ​like​ ​corporate​ ​actions,​ ​mergers​ ​and​ ​acquisitions,​ ​splits,​ ​reverse​ ​splits,​ ​dividends​ ​and 
distributions.​ ​This​ ​allows​ ​the​ ​team​ ​to​ ​be​ ​more​ ​focused​ ​on​ ​finding​ ​alpha.​ ​By​ ​a​ ​very​ ​crude​ ​estimate, 
a​ ​trading​ ​desk​ ​would​ ​have​ ​an​ ​extra​ ​1-2​ ​hours​ ​a​ ​day​ ​to​ ​work​ ​on​ ​alpha​ ​research,​ ​if​ ​they​ ​didn’t​ ​have 
 
 
 
 
 

to​ ​spend​ ​it​ ​on​ ​operational​ ​management​ ​of​ ​a​ ​portfolio​ ​with​ ​500+​ ​stock.​ ​This,​ ​in​ ​turn,​ ​increases 
returns​ ​and​ ​reduces​ ​costs.  
 
As​ ​Brian​ ​Peterson​ ​at​ ​DV​ ​Trading​ ​remarked​ ​[2]​ ​at​ ​a​ ​panel​ ​along​ ​with​ ​Gaurav,​ ​it​ ​would​ ​take​ ​upwards 
of​ ​$200​ ​million​ ​today​ ​to​ ​setup​ ​a​ ​high​ ​frequency​ ​trading​ ​firm.​ ​The​ ​same​ ​is​ ​thus​ ​true​ ​for​ ​an​ ​equity 
long/short​ ​trading​ ​firm​ ​since​ ​they​ ​are​ ​competing​ ​on​ ​the​ ​same​ ​alphas. 

Does​ ​long/short​ ​trading​ ​work​ ​better​ ​on​ ​stocks​ ​than​ ​on​ ​ETFs? 
We​ ​looked​ ​at​ ​returns​ ​of​ ​market​ ​neutral​ ​strategies​ ​on​ ​ETFs​ ​and​ ​stocks​ ​and​ ​this​ ​is​ ​what​ ​we​ ​found... 

Till​ ​2004​ ​L/S​ ​strategies​ ​indeed​ ​had​ ​better​ ​returns​ ​on​ ​stocks 

 
Net​ ​log-returns​ ​of​ ​long/short​ ​strategies​ ​on​ ​ETFs​ ​and​ ​stocks​ ​before​ ​2004 
 
The​ ​chart​ ​above​ ​compares​ ​the​ ​gross​ ​returns​ ​of​ ​long/short​ ​strategies​ ​on​ ​stocks​ ​and​ ​ETFs.​ ​Prior​ ​to 
2004,​ ​it​ ​was​ ​indeed​ ​the​ ​case​ ​that​ ​there​ ​was​ ​a​ ​lot​ ​more​ ​alpha​ ​in​ ​stocks​ ​than​ ​ETFs.​ ​However​ ​things 
changed​ ​since​ ​2004.​ ​Perhaps​ ​due​ ​to​ ​Reg-NMS​,​ ​which​ ​came​ ​into​ ​effect​ ​in​ ​2005,​ ​the​ ​amount​ ​of 
technological​ ​infrastructure​ ​needed​ ​to​ ​trade​ ​stocks​ ​against​ ​the​ ​basket​ ​became​ ​a​ ​lot​ ​more.​ ​As​ ​you 
will​ ​see​ ​below,​ ​since​ ​2004,​ ​long/short​ ​trading​ ​on​ ​ETFs​ ​has​ ​been​ ​performing​ ​much​ ​better​ ​than 
stocks. 

Since​ ​2004​ ​L/S​ ​strategies​ ​on​ ​ETFs​ ​have​ ​done​ ​better​ ​than​ ​stocks 
 

 
 
 
 
 

 
Returns​ ​of​ ​long/short​ ​strategies​ ​on​ ​ETFs​ ​and​ ​stocks​ ​since​ ​2004 
 
Since​ ​2004,​ ​long/short​ ​equity​ ​market​ ​neutral​ ​strategies​ ​on​ ​stocks​ ​have​ ​not​ ​done​ ​well.​ ​In​ ​fact​ ​since 
late​ ​2010,​ ​returns​ ​have​ ​not​ ​been​ ​positive.​ ​On​ ​the​ ​other​ ​hand,​ ​ETF​ ​based​ ​strategies​ ​have​ ​been 
doing​ ​much​ ​better.​ ​The​ ​equity​ ​curve​ ​of​ ​ETF​ ​long/short​ ​strategies​ ​is​ ​much​ ​more​ ​stable.​ ​Look​ ​at​ ​the 
financial​ ​crisis​ ​years.​ ​It​ ​is​ ​hardly​ ​noticeable.​ ​Even​ ​since​ ​2010,​ ​while​ ​stocks​ ​based​ ​long/short​ ​funds 
have​ ​failed​ ​to​ ​generate​ ​returns,​ ​ETF​ ​strategies​ ​have​ ​been​ ​growing​ ​steadily. 
 

Dispersion​ ​between​ ​ETFs​ ​is​ ​high​ ​enough​ ​to​ ​achieve​ ​risk​ ​targets 
A​ ​commonly​ ​quoted​ ​argument​ ​against​ ​ETFs​ ​is​ ​that​ ​they​ ​are​ ​very​ ​similar​ ​and​ ​there​ ​isn’t​ ​much 
dispersion​ ​between​ ​them.​ ​It​ ​is​ ​claimed​ ​that​ ​exorbitant​ ​leverage​ ​is​ ​required​ ​to​ ​take​ ​risk​ ​required​ ​for 
substantial​ ​returns.​ ​But​ ​this​ ​isn’t​ ​the​ ​case.​ ​In​ ​the​ ​chart​ ​below,​ ​we​ ​show​ ​the​ ​risk​ ​achieved​ ​by​ ​the 
same​ ​strategy​ ​as​ ​above.​ ​Even​ ​when​ ​we​ ​constrain​ ​long​ ​+​ ​short​ ​leverage​ ​to​ ​under​ ​6,​ ​the​ ​strategy 
manages​ ​to​ ​achieve​ ​a​ ​risk​ ​of​ ​6%​ ​in​ ​the​ ​low​ ​risk​ ​environment​ ​of​ ​today.  
 

 
 
 
 
 

 
Annualized​ ​volatility​ ​(in​ ​%)​ ​of​ ​a​ ​Long/Short​ ​strategy​ ​on​ ​ETFs 
 
There​ ​is​ ​a​ ​decent​ ​amount​ ​of​ ​dispersion​ ​being​ ​captured​ ​by​ ​ETF​ ​long/short​ ​trading. 

Executing​ ​via​ ​ETFs​ ​is​ ​more​ ​efficient 

The​ ​proliferation​ ​of​ ​a​ ​high​ ​frequency​ ​trade​​ ​[3],​ ​Index​ ​Arbitrage,​ ​has​ ​helped​ ​long/short​ ​strategies​ ​that 
trade​ ​ETFs.​ ​Index​ ​Arb​ ​firms​ ​buy​ ​and​ ​sell​ ​the​ ​ETF​ ​and​ ​the​ ​basket​ ​of​ ​shares​ ​when​ ​they​ ​see​ ​a 
discrepancy​ ​between​ ​the​ ​price​ ​of​ ​the​ ​ETF​ ​and​ ​the​ ​underlying​ ​stocks.​ ​This​ ​trade​ ​is​ ​now​ ​so​ ​big​ ​that 
more​ ​than​ ​half​ ​the​ ​trading​ ​on​ ​stocks​ ​is​ ​done​ ​by​ ​Index​ ​Arb​ ​firms.  
 
When​ ​we​ ​trade​ ​ETFs,​ ​it​ ​is​ ​like​ ​we​ ​are​ ​hiring​ ​these​ ​super​ ​sophisticated​ ​HFT​ ​firms​ ​to​ ​execute​ ​the 
underlying​ ​basket​ ​for​ ​us.​ ​And​ ​we​ ​are​ ​paying​ ​very​ ​little​ ​compared​ ​to​ ​what​ ​we​ ​would​ ​have​ ​to​ ​pay​ ​to 
execute​ ​the​ ​basket​ ​of​ ​single​ ​stocks​ ​ourselves.  
 
For​ ​a​ ​quant​ ​strategy​ ​on​ ​single​ ​stocks​ ​to​ ​be​ ​able​ ​to​ ​execute​ ​that​ ​efficiently,​ ​they​ ​would​ ​require​ ​a 
dedicated​ ​execution​ ​team​ ​costing​ ​millions.​ ​With​ ​ETFs​ ​you​ ​can​ ​achieve​ ​that​ ​practically​ ​for​ ​free.  
 

Shorting​ ​ETFs​ ​is​ ​easier 

ETFs​ ​today​ ​are​ ​highly​ ​liquid.​ ​It​ ​is​ ​much​ ​easier​ ​to​ ​find​ ​ETFs​ ​to​ ​borrow​ ​and​ ​short​ ​than​ ​it​ ​is​ ​to​ ​find 
single​ ​name​ ​stocks.​ ​Taking​ ​this​ ​ease​ ​of​ ​borrowing​ ​into​ ​account,​ ​ETF​ ​long/short​ ​portfolios​ ​end​ ​up 
becoming​ ​more​ ​profitable​ ​than​ ​the​ ​same​ ​for​ ​stocks. 
 
 

 
 
 
 
 

A​ ​quant​ ​ETF​ ​strategy​ ​is​ ​less​ ​risky​ ​than​ ​a​ ​L/S​ ​strategy​ ​on​ ​stocks 
Thanks​ ​to​ ​their​ ​idiosyncrasies,​ ​individual​ ​stocks​ ​are​ ​much​ ​riskier​ ​than​ ​the​ ​broad​ ​market.​ ​Therefore, 
in​ ​order​ ​to​ ​manage​ ​their​ ​risk,​ ​quant​ ​shops​ ​investing​ ​in​ ​individual​ ​stocks​ ​generally​ ​end​ ​up​ ​artificially 
limiting​ ​their​ ​allocation​ ​to​ ​some​ ​of​ ​the​ ​stocks.​ ​But​ ​diversification​ ​comes​ ​naturally​ ​with​ ​ETFs.  
 

Factor​ ​based​ ​investing​ ​comes​ ​cheap​ ​with​ ​ETFs 

In​ ​the​ ​past,​ ​one​ ​had​ ​to​ ​go​ ​to​ ​expensive​ ​fund​ ​managers​ ​in​ ​order​ ​to​ ​gain​ ​exposure​ ​to​ ​market​ ​factors. 
These​ ​funds​ ​would​ ​overweight​ ​and​ ​underweight​ ​individual​ ​stocks​ ​to​ ​introduce​ ​factor​ ​tilts​ ​in​ ​their 
portfolios.​ ​It​ ​is​ ​not​ ​needed​ ​anymore.​ ​Most​ ​of​ ​these​ ​factors​ ​are​ ​easily​ ​and​ ​cheaply​ ​available​ ​through 
ETFs.​ ​Factor​ ​based​ ​strategies​ ​like​ ​value,​ ​momentum​ ​and​ ​minimum​ ​volatility,​ ​which​ ​used​ ​to​ ​be 
hedge​ ​fund​ ​favorites​ ​in​ ​the​ ​past,​ ​have​ ​been​ ​reduced​ ​to​ ​just​ ​one​ ​of​ ​the​ ​flavors​ ​ETFs​ ​come​ ​in.​ ​Case 
in​ ​point​ ​is​ ​USMV,​ ​a​ ​minimum​ ​volatility​ ​ETF​ ​with​ ​an​ ​expense​ ​ratio​ ​of​ ​just​ ​0.15%.​ ​We​ ​expect​ ​AQR 
Two​ ​Sigma​ ​and​ ​others​ ​to​ ​launch​ ​factor​ ​ETFs​ ​to​ ​leverage​ ​their​ ​brand​ ​name​ ​in​ ​an​ ​increasingly 
commoditized​ ​industry[4]. 
 

Quant​ ​strategies​ ​on​ ​ETF​ ​are​ ​less​ ​prone​ ​to​ ​overfitting 

A​ ​company​ ​has​ ​a​ ​life​ ​cycle.​ ​When​ ​it​ ​starts​ ​it​ ​is​ ​usually​ ​growing​ ​fast.​ ​Then​ ​after​ ​various​ ​trials​ ​and 
tribulations​ ​and​ ​accompanying​ ​volatility​ ​it​ ​reaches​ ​a​ ​stable​ ​return​ ​period,​ ​and​ ​finally​ ​when​ ​a​ ​new 
upstart​ ​takes​ ​away​ ​its​ ​market,​ ​the​ ​company​ ​folds,​ ​often​ ​quite​ ​quickly.​ ​Looking​ ​at​ ​the​ ​historical​ ​data 
of​ ​a​ ​stock​ ​and​ ​just​ ​assuming​ ​that​ ​it​ ​has​ ​always​ ​been​ ​the​ ​same​ ​as​ ​it​ ​is​ ​today,​ ​isn’t​ ​a​ ​profitable 
strategy.​ ​ETFs​ ​have​ ​a​ ​much​ ​more​ ​slow​ ​changing​ ​nature​ ​to​ ​them.​ ​The​ ​ETF​ ​or​ ​at​ ​least​ ​the​ ​underlying 
index​ ​has​ ​a​ ​much​ ​longer​ ​history​ ​of​ ​data​ ​available​ ​to​ ​analyze.  
 
While​ ​constructing​ ​quant​ ​strategies,​ ​it​ ​is​ ​very​ ​easy​ ​to​ ​overfit.​ ​More​ ​the​ ​number​ ​of​ ​stocks​ ​in​ ​your 
backtest,​ ​easier​ ​it​ ​is​ ​to​ ​snoop​ ​the​ ​data​ ​and​ ​find​ ​a​ ​pattern​ ​which​ ​won’t​ ​repeat​ ​in​ ​reality.​ ​What​ ​you 
want​ ​is​ ​a​ ​stable​ ​and​ ​robust​ ​summary​ ​of​ ​the​ ​data,​ ​which​ ​is​ ​free​ ​from​ ​the​ ​daily​ ​noise​ ​of​ ​stocks.​ ​ETFs 
by​ ​construction​ ​are​ ​summaries​ ​of​ ​the​ ​market.​ ​ETF​ ​based​ ​strategies​ ​are​ ​thus​ ​much​ ​less​ ​prone​ ​to 
overfitting,​ ​and​ ​tend​ ​to​ ​work​ ​better​ ​when​ ​actually​ ​traded. 

 
 
 
 
 

Early​ ​majority​ ​stage​ ​in​ ​ETF​ ​adoption 

 
There​ ​are​ ​multiple​ ​stages​ ​in​ ​the​ ​adoption​ ​of​ ​any​ ​innovation.​ ​It​ ​has​ ​been​ ​studied​ ​time​ ​and​ ​again​ ​that 
the​ ​early​ ​majority​ ​stage​ ​is​ ​when​ ​the​ ​reward​ ​to​ ​risk​ ​ratio​ ​peaks.​ ​ETFs​ ​are​ ​just​ ​entering​ ​the​ ​early 
majority​ ​stage.​ ​The​ ​growth​ ​of​ ​ETFs​ ​is​ ​still​ ​picking​ ​up.​ ​There​ ​are​ ​about​ ​2000​ ​ETFs​ ​and​ ​many​ ​more 
are​ ​being​ ​launched​ ​every​ ​year.​ ​Hence​ ​there​ ​is​ ​a​ ​lot​ ​of​ ​opportunity​ ​in​ ​ETFs​ ​right​ ​now. 

ETFs​ ​are​ ​new​ ​and​ ​not​ ​many​ ​quants​ ​know​ ​how​ ​to​ ​trade​ ​them 
Long/short​ ​equity​ ​trading​ ​has​ ​been​ ​done​ ​for​ ​many​ ​decades​ ​now.​ ​Books​ ​have​ ​been​ ​written​ ​about 
how​ ​to​ ​trade​ ​stocks​ ​long/short.​ ​People​ ​know​ ​this​ ​trade​ ​very​ ​well.​ ​It​ ​is​ ​very​ ​difficult​ ​to​ ​source​ ​alpha 
in​ ​it. 
 
It​ ​is​ ​clear​ ​from​ ​the​ ​charts​ ​above​ ​that​ ​much​ ​of​ ​the​ ​alpha​ ​that​ ​was​ ​there​ ​earlier,​ ​pre-2004​ ​that​ ​is,​ ​was 
actually​ ​between​ ​the​ ​stocks​ ​and​ ​the​ ​basket​ ​themselves.​ ​Now​ ​that​ ​high​ ​frequency​ ​trading​ ​index 
arbitrageurs​ ​are​ ​doing​ ​that​ ​trade,​ ​the​ ​alpha​ ​is​ ​not​ ​realizable​ ​for​ ​traditional​ ​long/short​ ​firms. 
 
ETFs​ ​long/short​ ​on​ ​the​ ​other​ ​hand​ ​is​ ​new.​ ​ETFs​ ​themselves​ ​are​ ​very​ ​new.​ ​They​ ​were​ ​less​ ​than​ ​a 
fifth​ ​of​ ​their​ ​current​ ​size​ ​ten​ ​years​ ​ago​ ​[5].​ ​Read​ ​more​ ​about​ w ​ hat​ ​US​ ​ETF​ ​market​ ​looks​ ​like 
today​[5]. 
 
There​ ​is​ ​more​ ​alpha​ ​to​ ​be​ ​derived​ ​in​ ​ETF​ ​long/short​ ​trading. 
 

Conclusion 
In​ ​many​ ​alpha​ ​seeking​ ​strategies,​ ​we​ ​are​ ​seeing​ ​higher​ ​returns​ ​when​ ​trading​ ​ETFs.​ ​All​ ​strategies 
that​ ​look​ ​at​ ​longer​ ​term​ ​prediction​ ​often​ ​related​ ​to​ ​broader​ ​market​ ​factors​ ​and​ ​these​ ​trades​ ​can​ ​be 
expressed​ ​more​ ​efficiently​ ​through​ ​ETFs.​ ​Much​ ​of​ ​the​ s​ hort-term​ ​alpha​ ​in​ ​single​ ​stocks​ ​has​ ​been 

 
 
 
 
 

captured​ ​by​ ​High​ ​Frequency​ ​Trading​ ​firms,​ ​leaving​ ​little​ ​for​ ​equity​ ​market​ ​neutral​ ​StatArb​ ​portfolio 
managers​​ ​[2]. 
While​ ​hedge​ ​funds​ ​have​ ​been​ ​underperforming​ ​the​ ​average​ ​investor​[6],​ ​and​ ​CIOs​ ​have​ ​been 
shifting​ ​to​ ​ETFs[7],​ ​long/short​ ​funds​ ​should​ ​wake​ ​up.  

References 
1. Qplum’s​ ​flagship​ ​portfolio 
2. The​ ​ten​ ​year​ ​evolution​ ​of​ ​quant:​ ​Trend​ ​Following,​ ​StatArb,​ ​HFT,​ ​Deep​ ​Learning 
3. Three​ ​sources​ ​of​ ​Alpha​ ​and​ ​where​ ​high​ ​frequency​ ​trading​ ​fits​ ​in 
4. Is​ ​yesterday’s​ ​quant​ ​strategy​ ​in​ ​tomorrow’s​ ​ETF? 
5. What​ ​US​ ​ETF​ ​market​ ​looks​ ​like​ ​today 
6. A​ ​detailed​ ​report​ ​on​ ​the​ ​investment​ ​patterns​ ​of​ ​US​ ​investors 
7. Smaller​ ​endowments​ ​should​ ​focus​ ​on​ ​ETFs 
8. ETF​ ​inflows​ ​are​ ​almost​ ​double​ ​of​ ​last​ ​year 
9. Quant​ ​firm​ ​AQR​ ​seeks​ ​SEC​ ​approval​ ​to​ ​sell​ ​ETFs 
10. Dynamic​ ​Flat​ ​CIO​ ​office​ ​needed​ ​today 
11. One​ ​trillion​ ​more​ ​in​ ​ETFs​ ​than​ ​hedge​ ​funds​ ​now! 
12. Qplum’s​ ​perfomance​ ​attribution 
13. Reg-NMS​ ​invigorated​ ​the​ ​HFT​ ​eco​ ​system​ ​and​ ​make​ ​equity​ ​market​ ​neutral​ ​alpha​ ​tougher​ ​in 
stocks 

Disclosures 
All​ ​investments​ ​carry​ ​risk.​ ​This​ ​material​ ​is​ ​for​ ​informational​ ​purposes​ ​and​ ​should​ ​not​ ​be​ ​considered​ ​specific​ ​investment 
advice​ ​or​ ​recommendation​ ​to​ ​any​ ​person​ ​or​ ​organization.​ ​Past​ ​performance​ ​is​ ​not​ ​indicative​ ​of​ ​future​ ​performance. 
Please​ ​visit​ ​our​ ​website​ ​for​ ​full​ ​disclaimer​​ ​and​ ​terms​ ​of​ ​use​.