My Factor Philippic

June 22, 2016
  • Topic:

    Factor Investing, Portfolio Trading, Style Investing

Here is a link to my latest on the ongoing issue of style timing and the very legitimacy of some of the factor strategies. To whet your appetite, below is the abstract of the paper:

Arnott, Beck, Kalesnik, and West (2016) (ABKW) study smart beta or factor-based strategies and come to the following conclusions: (1) Aside from value, most popular factor strategies currently look expensive. (2) These expensive factor valuations portend lower future returns and a strong possibility of a future “factor crash” in which they go “horribly wrong.” And (3) many of these non-value factors were never real to start with because their historical performance was due to factor richening. That is, researchers mistook the one-time returns from factor richening for truly repeatable “structural alpha.” ABKW’s implied bottom line (their many protestations to only making modest recommendations aside): stick with value, dump the other factors. This essay elaborates on my response in Asness (2016). In summary: (1) I find non-value factor valuations moderately expensive, but not as expensive as ABKW. (2) I argue that ABKW exaggerate the power of factor timing by improperly using long-horizon regression techniques. More proper short-horizon regressions suggest some weak factor timing ability and given this predictability, I construct value-based tactical factor timing strategies to test them. Unfortunately, these strategies add little to portfolios that are already invested in the value factor. It turns out that this “newly” discovered timing tool is, yet again, mostly just a version of regular old value investing. And (3) I examine ABKW’s claim that factor richening drives much of non-value long-term factor performance and find that this very serious allegation about other researchers’ work is totally without merit. Overall, these results suggest that one should be wary of aggressive factor timing. Instead, investors are better off identifying factors they believe in, and staying diversified across them, unless we see far more extreme pricing than we do today.



  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees.
  • This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such.
  • The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Diversification does not eliminate the risk of experiencing investment losses.
  • Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely.
  • The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision.
  • Information contained on third party websites that AQR Capital Management, LLC, (“AQR”) may link to are not reviewed in their entirety for accuracy and AQR assumes no liability for the information contained on these websites.
  • No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from AQR.