Factor-Based Asset Allocation vs. Asset-Class-Based Asset      Allocation

Idzorek, Thomas M.; Kowara, Maciej

doi:10.2469/faj.v69.n3.7

Cited by 36 publications

(18 citation statements)

References 12 publications

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“…factors are not directly accessible to investors (Idzorek and Kowara, 2013), and factor-based ETFs typically offer exposure to long legs only. Therefore, we argue that judging the effectiveness of factor investing should take into account market characteristics such as the existence of legal restrictions and specific costs, which can significantly affect performance.…”

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confidence: 99%

Factor Investing: The Rocky Road from Long Only to Long Short

Brière

Szafarz

2017

SSRN Journal

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This paper examines how restrictions on short positions affect the financial attractiveness of factor investing. To fill the gap between unconstrained longshort allocations and restricted long-only portfolios, we consider two in-between strategies. The first imposes that only the market can be shorted; the second is the so-called "130/30" or "active extension" trading strategy, which caps total short exposure at 30%. The takeaways from our research are twofold. First, short sales contribute significantly to the mean-variance performance of efficient factor-based portfolios. Second, the factor portfolios built originally by Fama and French (1992) with the purpose of developing asset pricing are impressively clear-sighted when it comes to portfolio management. Indeed, combining these portfolios generates mean-variance performances similar to those of optimized long-short portfolios, except for low levels of volatility.Keywords: Investment, asset allocation, factor investing, long-only, long-short, 130-30. 2 ABSTRACT This paper examines how restrictions on short positions affect the financial attractiveness of factor investing. To fill the gap between unconstrained long-short allocations and restricted longonly portfolios, we consider two in-between strategies. The first imposes that only the market can be shorted; the second is the so-called "130/30" or "active extension" trading strategy, which caps total short exposure at 30%. The takeaways from our research are twofold. First, short sales contribute significantly to the mean-variance performance of efficient factor-based portfolios.Second, the factor portfolios built originally by Fama and French (1992) with the purpose of developing asset pricing are impressively clear-sighted when it comes to portfolio management.Indeed, combining these portfolios generates mean-variance performances similar to those of optimized long-short portfolios, except for low levels of volatility.3

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confidence: 99%

Factor Investing: The Rocky Road from Long Only to Long Short

Brière

Szafarz

2017

SSRN Journal

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“…On a practical basis, using monthly return to estimate assets' covariance matrix might be cumbersome because of the short track records of the Exchange-Traded Fund (ETF) universe. Although our paper, we intend to reconstruct a proxy for the market portfolio based on risk-factor-based assets, a real-life application with tradable assets (Idzorek and Kowara (2013)) would impose constraints on the historical information available to replicate our results. For this reason -to stay as close as possible to what real-world applications may offer -we focus our optimizations on 60-day rolling windows.…”

Section: Estimation Of the Covariance Matrixmentioning

confidence: 99%

Smart Equity Investing: Implementing Risk Optimization Techniques on Strategic Beta Portfolios

2018

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We examine the performance of risk-optimization techniques on equity style portfolios. To form these portfolios, also called Strategic Beta factors by practitioners and data providers, we group stocks based on size, value and momentum characteristics through either independent or dependent sorting. Overall, performing risk-oriented strategies on style portfolios constructed with a dependent sort deliver greater abnormal returns. On average, we observe these strategies to significantly outperform 42% of the risk-oriented ETFs listed on US exchanges, compared to 31% when the risk-oriented strategies are performed on portfolios formed with an independent sort. We attribute the outperformance yielded by dependent sorting to the fact that it provides a better stratification of the set of stocks' opportunity and diversification properties. Classification Codes: 370, 380

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“…The main limitation of the method is that it still requires making allocations among traditional asset classes and is therefore dependent on the risk-return characteristics of these asset classes. It has also been found that, using both an idealized mathematical model and optimisations based on empirical data, that neither factor-based nor asset-class-based asset allocation is inherently superior to the other (Idzorek & Kowara 2013). An approach using return-generating factors instead of underlying risk exposures have also been suggested (Asl & Etula 2012).…”

Section: Other Asset Allocation Modelsmentioning

confidence: 99%

Asset Allocation: Analysis of Theory and Practice in the Australian Investment Management Industry

Santacruz

2014

SSRN Journal

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Factor-Based Asset Allocation vs. Asset-Class-Based Asset Allocation

Cited by 36 publications

References 12 publications

Factor Investing: The Rocky Road from Long Only to Long Short

Factor Investing: The Rocky Road from Long Only to Long Short

Smart Equity Investing: Implementing Risk Optimization Techniques on Strategic Beta Portfolios

Asset Allocation: Analysis of Theory and Practice in the Australian Investment Management Industry

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