EFS: Evolutionary Factor Searching for Sparse Portfolio Optimization Using Large Language Models
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| Format: | Preprint |
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2025
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| _version_ | 1866916858581483520 |
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| author | Luo, Haochen Zhang, Yuan Liu, Chen |
| author_facet | Luo, Haochen Zhang, Yuan Liu, Chen |
| contents | Sparse portfolio optimization is a fundamental yet challenging problem in quantitative finance, since traditional approaches heavily relying on historical return statistics and static objectives can hardly adapt to dynamic market regimes. To address this issue, we propose Evolutionary Factor Search (EFS), a novel framework that leverages large language models (LLMs) to automate the generation and evolution of alpha factors for sparse portfolio construction. By reformulating the asset selection problem as a top-m ranking task guided by LLM-generated factors, EFS incorporates an evolutionary feedback loop to iteratively refine the factor pool based on performance. Extensive experiments on five Fama-French benchmark datasets and three real-market datasets (US50, HSI45 and CSI300) demonstrate that EFS significantly outperforms both statistical-based and optimization-based baselines, especially in larger asset universes and volatile conditions. Comprehensive ablation studies validate the importance of prompt composition, factor diversity, and LLM backend choice. Our results highlight the promise of language-guided evolution as a robust and interpretable paradigm for portfolio optimization under structural constraints. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2507_17211 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | EFS: Evolutionary Factor Searching for Sparse Portfolio Optimization Using Large Language Models Luo, Haochen Zhang, Yuan Liu, Chen Portfolio Management Sparse portfolio optimization is a fundamental yet challenging problem in quantitative finance, since traditional approaches heavily relying on historical return statistics and static objectives can hardly adapt to dynamic market regimes. To address this issue, we propose Evolutionary Factor Search (EFS), a novel framework that leverages large language models (LLMs) to automate the generation and evolution of alpha factors for sparse portfolio construction. By reformulating the asset selection problem as a top-m ranking task guided by LLM-generated factors, EFS incorporates an evolutionary feedback loop to iteratively refine the factor pool based on performance. Extensive experiments on five Fama-French benchmark datasets and three real-market datasets (US50, HSI45 and CSI300) demonstrate that EFS significantly outperforms both statistical-based and optimization-based baselines, especially in larger asset universes and volatile conditions. Comprehensive ablation studies validate the importance of prompt composition, factor diversity, and LLM backend choice. Our results highlight the promise of language-guided evolution as a robust and interpretable paradigm for portfolio optimization under structural constraints. |
| title | EFS: Evolutionary Factor Searching for Sparse Portfolio Optimization Using Large Language Models |
| topic | Portfolio Management |
| url | https://arxiv.org/abs/2507.17211 |