Factor Investing And The Pitfalls Of Poor Strategy Construction

Key Takeaways

Factor bets are meant to be truly orthogonal or independent bets
Criteria for durability:
  • persistent through time
  • pervasive across geography and asset class
  • Is it profitable after transaction costs?
  • Consistent over various ways of defining the premia (ie value as P to B OR price to EBITDA)
  • value
  • momentum
  • defensive (low-vol)
  • carry
  • trend
  • volatility
  • merger arb
  • insuring catastrophe
Style premia can perform poorly for long periods
  • If they didn’t they would be arbitraged away
  • It’s critical to study what the contours and shapes of these payoffs look like. If you cannot stick with periods of poor performance you risk chopping yourself impairing your money-weighted returns