How “beta learning” improves macro trading strategies
Macro beta is the sensitivity of a financial contract’s return to a broad economic or market factor. Macro betas broaden the traditional concept of equity market betas and can often be estimated using financial contract baskets. Macro sensitivities are endemic in trading strategies, diluting alpha, undermining portfolio diversification, and distorting backtests. However, it is possible to immunize strategies through “beta learning,” a statistical learning method that supports identifying appropriate models and hyperparameters and allows backtesting of hedged strategies without look-ahead bias. The process can be easily implemented with existing Python classes and methods. This post illustrates the powerful beneficial impact of macro beta estimation and its application on an emerging market FX carry strategy.