Factor Attribution and the Impact of Investment Constraints

38 Pages Posted: 14 Jul 2015 Last revised: 1 Dec 2015

Date Written: November 30, 2015


We customize factor attribution for quantitative equity portfolios to better align the measurement of factor returns with how factor tilts were taken on. Specifically, we provide a theoretical argument for including the absolute value of factor exposures in the attribution to account for the impact of a long-only constraint, as well as intuition for including lagged factor exposures in the presence of turnover limits. This may reduce any long-term unexplained performance resulting from priced distortions of unconstrained factor tilts. In addition, we find that targeting the most accurate estimates of factor returns irrespective of investment constraints can amplify the impact of stock-specific risk on performance attribution. Instead, restricted least squares estimates of the factor returns may retain good accuracy while letting factor attribution explain short-term portfolio performance in full, based on minimally adjusted factor-mimicking portfolios that span the portfolio under consideration. We report back-tests of quantitative equity strategies that confirm our intuition, and suggest diagnostics for portfolio managers who consider adopting the proposed attribution framework.

Keywords: factor attribution, performance attribution, quantitative equities, restricted least squares, nonlinear factor models

JEL Classification: G12, G15, C13, C51, C52

Suggested Citation

De Boer, Sanne and Jeet, Vishv, Factor Attribution and the Impact of Investment Constraints (November 30, 2015). Available at SSRN: https://ssrn.com/abstract=2630430 or http://dx.doi.org/10.2139/ssrn.2630430

Sanne De Boer (Contact Author)

Voya Investment Management ( email )

230 Park Avenue
13th Floor
New York, NY 10069
United States

Vishv Jeet

PGIM-IAS ( email )

Prudential Tower
655 Broad Street, 19th Floor
Newark, NJ 07102
United States

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