Keep the Alpha, Cut the Risk: Macro-Factor and PC Neutralization in Equity Portfolios

This study introduces an approach to neutralise unwanted sources of risk in long-short equity portfolios by enforcing orthogonality either to PCA-based statistical factors (12 PCs estimated on the MSCI World universe with 3 years of weekly returns) or to 11 predefined cross-asset macro risk factors, generalising the market-neutrality constraint of the N-LASR model into 12 or 11 equality constraints. The neutralised strategies slightly reduce returns but aggressively cut volatility, lifting the full-sample net Sharpe ratio by about 30%;