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Factor-Related Misconceptions and Multi-Factor Analysis

Top Recent Papers on Factor Anomalies

Axioma and Robeco seem to agree that focusing on a single factor portfolio (with unintended exposures to other factors) is a mistake, and efficient factor investing may necessitate a multi-factor perspective.  Additionally, Research Affiliates describes common misconceptions about factor investing that involve performance expectations, diversification, and risk management within factor portfolios. 

The papers listed below also cover specific factor anomalies, factor integration, and an up-to-date census of all published factors within the factor zoo. 

factor misconception

Factors and ESG: The Truth Behind Three Myths (MSCI, 2019)

As investment managers continue to consider ESG criteria a fundamental part of their investment process, understanding how factors and ESG relate to each other has become increasingly important. Common misconceptions about ESG and factors should be challenged.

Smart Beta Strategies: A Main Driver of ETF Demand (BlackRock, 2019)

For compliance reasons, this paper is only accessible in the United States

As a part of its 9th annual US ETF Study, Greenwich Associates interviewed 181 institutional investors on the linkage between the utilisation of smart beta strategies and the demand for ETFs. Around one-third of investors surveyed plan on increasing allocations to factor-based or smart beta ETFs over the next year.

The characteristics of factor investing (Robeco, 2019)

Robeco unveils the sub-optimal nature of single-factor portfolios, and in the process of doing so, explains why efficient factor investing necessitates a multi-factor perspective.

What, Exactly, Is a Factor? (Axioma, 2019)

Similarly, Axioma sets out to answer the fundamental question - What, exactly is a factor? - by focusing in on the concept of factor purity.

Strike the Right Balance in Multi-Factor Strategy Design (Research Affiliates, 2019)

In this paper, Research Affiliates looks at factor strategy design, finding that the method of implementation has a significant effect on performance in a multi-factor portfolio.

Generating Alpha in Bottom-Up Systematic Credit Portfolios (Fidelity Intl, May 2019)

For compliance reasons, this paper is only accessible in the UK & Europe

The authors provide an overview of factor investing in fixed income markets, then describe a particular portfolio construction methodology that may have the potential to minimize some of the pitfalls of factor integration while preserving the benefits of factor utilisation.

Tax-Managed Factor Strategies (Financial Analysts Journal, 2019)

The authors look at tax loss harvesting within an indexing strategy, as well as six factor tilts for US equities over a 23 year period.

Is the Low Volatility Anomaly Universal? (S&P Dow Jones Indices, 2019)

Just how universal is the low volatility anomaly? It seems to be fairly ubiquitous. S&P Dow Jones Indices examines this anomaly in the S&P 500 as well as other markets.

Three Blunders That Plague Factor Investing (Research Affiliates, 2019)

The authors argue that the philosophy behind factor investing is compromised by a number of problems that investors often fail to understand. For this reason, it has failed to live up to expectations.

Forecasting Factor Returns (Two Sigma, May 2019)

In this paper, Two Sigma proposes a methodology using historical data to quantify the return premia for major asset-class based factors.

A Census of the Factor Zoo (2019)

The authors of this SSRN paper have documented over 400 factors that have been published in top journals. They look at p-hacking within the factor zoo, also providing a census of published factors through Jan 2019.

Factor Report (Lazard AM, 2019)

Lazard Asset Management reviews growth, value, sentiment, quality, and risk factor returns across multiple equity markets in a report that's updated on a monthly basis.