Title: Portfolio Construction Matters,
Abstract: The role of portfolio construction in the implementation of equity market
neutral factors is often underestimated. Taking the classical momentum strategy
as an example, we show that one can significantly improve the main strategy's
features by properly taking care of this key step. More precisely, an optimized
portfolio construction algorithm allows one to significantly improve the Sharpe
Ratio, reduce sector exposures and volatility fluctuations, and mitigate the
strategy's skewness and tail correlation with the market. These results are
supported by long-term, world-wide simulations and will be shown to be
universal. Our findings are quite general and hold true for a number of other
"equity factors". Finally, we discuss the details of a more realistic set-up
where we also deal with transaction costs.