How do I build a sector-neutral equity strategy?

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AcadiFi · Accepted Answer

A sector-neutral strategy matches benchmark sector weights exactly (within tolerance) so all active return comes from intra-sector stock selection. This isolates the manager's stock-picking skill from macro sector calls. Construction mechanics: Step 1: Define the benchmark. For S&P 500, use GICS 11-sector weights. At a snapshot: - Technology: 28.5% - Financials: 13.1% - Healthcare: 12.4% - Consumer Discretionary: 10.8% - (etc.) Step 2: Set neutrality tolerance. Tight = ±25 bps per sector. Loose = ±100 bps. Most institutional sector-neutral funds run ±50 bps. Step 3: Generate stock-level alpha scores within each sector. Use your signal (quality, momentum, value composite) to rank all stocks within a sector by expected excess return. Step 4: Optimize with constraints. The optimizer maximizes expected portfolio alpha subject to: (a) sector weights within ±50 bps of benchmark, (b) single-stock weights capped at 2x benchmark, (c) turnover budget. Step 5: Rebalance quarterly. Each rebalance re-checks sector drift and redistributes holdings to maintain neutrality. Example — Moorpark Systematic Equity manages $4.2B sector-neutral. In Q1 2026, they identified Jaspine Tech (Tech sector) as their strongest signal. Instead of overweighting Tech from 28.5% to 32%, they simply overweighted Jaspine within their Tech sleeve to 1.8% (vs. its 0.4% benchmark weight) and underweighted other Tech names to keep the sleeve at 28.5% total. Pure stock bet, zero sector bet. ```mermaid flowchart TD A[Benchmark Sector
Weight] --> B[Match ±50bp] B --> C[Intra-Sector
Alpha Ranking] C --> D[Overweight
Top Names] D --> E[Underweight
Bottom Names] ``` Performance attribution on such a fund should show zero contribution from sector allocation and 100% from stock selection — that's the test of whether neutrality is being enforced.

How do I build a sector-neutral equity strategy?

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