← Lab
S056

S-056 — statarb-expression-neutrality-vol-v1 (better hedge estimate + book-level vol targeting on the frozen S-038 signal)

statarb-expression-neutrality-vol-v1
stage 2026-09-25
Share: Twitter / X LinkedIn

The idea and the mechanism

S-038's worst stretch was not a crash and was not, on the evidence so far, a market event. Between 2021-07 and 2023-02 it lost 21.2% while the S&P fell only 7.5%; across the full 34-month episode it gave back book losing money in a rising market is a failure of expression, not of direction.

Two expression weaknesses are identifiable in advance:

1. The hedge ratio lags. Each name is hedged against a β-weighted combination of the nine sector ETFs, with the βs estimated on a rolling window. A rolling estimate is by construction late to a change in a name's factor loading, and the error does not cancel across names — it accumulates into book-level beta. This is not speculation about the mechanism: its sibling D-005 measured exactly this failure, where the momentum signal ordering worked as predicted and realised beta came out at +0.99 against a frozen |β| ≤ 0.15 gate. Twice now the signal has held while neutrality broke.

2. Gross exposure is constant. The book carries the same size into a high-volatility regime as into a calm one, so its realised risk is whatever the market hands it. Volatility clustering is among the most robust facts in this data, which makes predicted book volatility a far more tractable target than return. There is a second payoff specific to this account: S-048's margin buffer is a hard constraint, so a book that de-levers itself before a stress month is worth money independently of its Sharpe.

This is not an alpha claim. It proposes no new edge and takes no trades S-038 does not already take. Like S-048 it is a construction / risk-management claim, and it is labelled as one: the honest success statement is "the same signals, better hedged and better sized, with less drawdown per unit of return".

The frozen gate

deliberately left open — a gate written after seeing the data is not a gate.

Options drafted 2026-10-03 — owner chose 1c and 2c the same day

Still open after that choice: the two Stage-1 thresholds and the freeze date. Picking the estimators says what will be tested; it does not say what counts as passing, and that is the half that must be fixed before anything runs.

Three candidates per arm, each a named specification so the trial count stays countable. These are proposals: until one is chosen and frozen, the [CALIBRATE] below is still open.

Arm 1 — the hedge estimator. Baseline: rolling OLS beta over a 60-day window against the 9 sector ETFs.

specification what it fixes what it costs
1a longer window, 120d halves estimation noise; the simplest possible change, one number slower to adapt — in a regime turn the beta is stale for longer, which is exactly when D-005 broke
1b EWMA beta, half-life ≈40d adapts to a changing loading without waiting for a window to roll off noisier on quiet names; a half-life is a fitted parameter even when it looks like a convention
1c shrinkage toward the cross-sectional mean (Vasicek / Ledoit-Wolf style) attacks the actual failure — per-name estimation error on ~195 names, which does not cancel and accumulates into book beta one shrinkage intensity to choose, and it biases every beta toward the average name

Recommendation if you want one: 1c. It is the only option aimed at the mechanism that was measured (per-name error accumulating into book-level beta) rather than at the window length.

Arm 2 — volatility targeting. Baseline: constant gross exposure.

specification what it fixes what it costs
2a inverse realised vol, 60d, target 10%/yr, gross capped at 1.25× base the classic; symmetric, well-evidenced, easy to audit levers up in calm periods, which is when a market-neutral book is most likely to be quietly accumulating crowded risk
2b EWMA vol, half-life 20d, same target and cap reacts to a vol spike in days instead of months materially more turnover, and turnover is charged at 3 bps/side
2c downside-only: scale DOWN when predicted vol exceeds target, never up protects drawdown and the margin buffer without ever adding leverage; lowest turnover of the three gives up the return that symmetric targeting earns in calm regimes, so it will look worse on headline return by construction

Recommendation if you want one: 2c. The stated objective is drawdown and the margin buffer, and S-048's buffer is a hard constraint — a rule that can only de-lever cannot breach it. 2a's upside leg is the part most likely to be flattered by a backtest that never faced a margin call.

field value
Hedge estimator (arm 1) 1c — shrinkage toward the cross-sectional mean (owner chose 2026-10-03)
Vol-target specification (arm 2) 2c — downside-only: scale DOWN above target, never up (owner chose 2026-10-03)
Stage-1 bar, arm 1 [CALIBRATE] — stated on realised |β| and its dispersion, not on return
Stage-1 bar, arm 2 [CALIBRATE] — stated on max-drawdown and stressed buying power, with return as a constraint that must not fall
Cost standard net of S-038's own ≤4 bps/side realised execution standard — an arm that wins gross and loses net is a fail
Baseline the frozen S-038, on identical signals and dates. Never equal weight, never unhedged
Frozen [CALIBRATE] — date the owner says "freeze"

Two rules that are not calibratable and hold whatever the thresholds turn out to be:

What we expect to find

Written before the run, and reported either way.

We expect arm 1 to be the one that pays, because there is a measured failure to correct rather than a hoped-for improvement, and because beta is an estimation problem with abundant data and persistent structure. We expect the improvement to show up as lower realised |β| and a shorter drawdown, not as higher return — if return rises materially that is a warning sign, not a result, because better hedging should cost a little return in exchange for less of someone else's risk.

We expect arm 2 to reduce max-drawdown and to cost some return, which is the trade it is supposed to make; the test is whether the drawdown reduction is larger than the return given up, net of the turnover that re-scaling creates.

We expect the most likely failure mode to be that the rolling hedge is already good enough, so arm 1 reproduces it with more variance and no gain. And we hold this lab's base rate in view: seven of eight discovery studies NULL, D-001 at probability of backtest overfitting (PBO) 0.93, D-011 at universe PBO 0.486 after ten names cleared Deflated Sharpe Ratio (DSR) > 0.95 under FDR control.

Methodology appendix — gates, exact parameters, look-ahead audit — is visible to subscribers. See the plans →

← OlderMarket-neutral reversion + momentum — κ<60 exit-patience (S-038 successor) Newer →Shorting the morning's hardest gap-ups against the index

Mechaniq provides information, not investment advice. We do not execute trades. Past results are no guarantee for future performance. You are solely responsible for your trading decisions.

Lab · Methodology · Greeks Lab · About · FAQ · Glossary · Privacy · Terms · mechaniq.trade © 2026

14 Nov 2026, 19:47