Factor Factory: How LLMs Are Reinventing Sparse Portfolio Optimization
In quantitative finance, sparse portfolio optimization is a famously unforgiving problem. Selecting the top m assets from a universe of n under budget and risk constraints is NP-hard, highly sensitive to hyperparameters, and often brittle in volatile markets. Traditional solutions—from greedy algorithms to convex relaxations—either crumble under market shifts or produce opaque, overfitted outputs. But what if we reframed the problem entirely? Enter EFS (Evolutionary Factor Search), a radical new framework that turns sparse portfolio construction into an LLM-guided ranking game. Instead of laboriously tuning machine learning models or relying on rigid heuristics, EFS lets large language models generate, evolve, and select alpha factors—and it does so in a way that is not just automated, but interpretable, adaptive, and surprisingly effective. ...