Factor Investing from Concept to Implementation

29 Pages Posted: 11 Jan 2019

See all articles by Eduard Van Gelderen

Eduard Van Gelderen

Erasmus University Rotterdam (EUR) - Department of Financial Management

Joop Huij

Erasmus University - Rotterdam School of Management; Robeco; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Georgi Kyosev

Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM); Robeco Asset Management

Date Written: January 10, 2019

Abstract

Mutual funds following factor investing strategies based on equity asset pricing anomalies, such as the small cap, value, and momentum effects, earn significantly higher alphas than traditional actively managed mutual funds. A buy-and-hold strategy for a random factor fund yields 110 basis points per annum in excess of the return earned by the average traditional actively managed mutual fund. However, the actual returns that investors earn by investing in factor mutual funds are significantly lower because investors dynamically reallocate their funds both across factors and factor managers. Although factor funds have attracted significant fund flows over our sample period, it appears that fund flows have been driven by factor funds earning high past returns and not by the funds providing factor exposures. We argue that rather than timing factors and factor managers, investors would be better off by using a buy-and-hold strategy and selecting a multi-factor manager.

Keywords: factor investing, small cap, value, momentum, low-risk, profitability, investments, fund flows

JEL Classification: G11, G12, G14

Suggested Citation

Van Gelderen, Eduard and Huij, Joop and Kyosev, Georgi, Factor Investing from Concept to Implementation (January 10, 2019). Available at SSRN: https://ssrn.com/abstract=3313364 or http://dx.doi.org/10.2139/ssrn.3313364

Eduard Van Gelderen

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands

Joop Huij

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.rsm.nl/jhuij

Robeco

Rotterdam, 3014DA
Netherlands

HOME PAGE: http://www.robeco.com/

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Georgi Kyosev (Contact Author)

Erasmus University Rotterdam (EUR), Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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