Active Factor Completion Strategies

Journal of Portfolio Management, 2021 Quantitative Special Issue, Vol. 47(2), pp. 9-37

Posted: 16 Apr 2019 Last revised: 8 Feb 2022

See all articles by Hubert Dichtl

Hubert Dichtl

dichtl research & consulting GmbH; University of Hamburg

Wolfgang Drobetz

University of Hamburg

Harald Lohre

Robeco Quantitative Investments; Lancaster University Management School

Carsten Rother

Invesco; University of Hamburg

Date Written: February 25, 2020

Abstract

Embracing the concept of factor investing, the authors design a flexible framework for building out different factor completion strategies for traditional multi-asset allocations. Their notion of factor completion comprises a maximally diversified reference portfolio anchored in a multi-asset multi-factor risk model that acknowledges market factors such as equity, duration, and commodity, as well as style factors such as carry, value, momentum, and quality. The specific nature of a given factor completion strategy varies with investor preferences and constraints. The authors tailor a select set of factor completion strategies that include factor-based tail hedging, constrained factor completion, and a fully diversified multi-asset multi-factor proposition. Their framework is able to organically exploit tactical asset allocation signals while not sacrificing the notion of maximum diversification. To illustrate, the authors additionally embed the common trend style that permeates many asset classes, and they also include the notion of style factor momentum.

Keywords: Diversification, Risk Parity, Factor Completion, Multi-Asset Multi-Factor Investing, Factor-based Models, Portfolio Management/Multi-Asset Allocation, Style Investing

JEL Classification: G11, D81

Suggested Citation

Dichtl, Hubert and Drobetz, Wolfgang and Lohre, Harald and Rother, Carsten, Active Factor Completion Strategies (February 25, 2020). Journal of Portfolio Management, 2021 Quantitative Special Issue, Vol. 47(2), pp. 9-37, Available at SSRN: https://ssrn.com/abstract=3356521 or http://dx.doi.org/10.2139/ssrn.3356521

Hubert Dichtl

dichtl research & consulting GmbH ( email )

Am Bahnhof 7
65812 Bad Soden am Taunus
Germany

HOME PAGE: http://www.dichtl-research-consulting.de

University of Hamburg ( email )

Moorweidenstr. 18
Hamburg, 20148
Germany

Wolfgang Drobetz

University of Hamburg ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Harald Lohre

Robeco Quantitative Investments ( email )

Weena 850
Rotterdam, 3011 AG
Netherlands

Lancaster University Management School

Bailrigg
Lancaster LA1 4YX
United Kingdom

HOME PAGE: http://www.lancaster.ac.uk/lums/people/harald-lohre

Carsten Rother (Contact Author)

Invesco ( email )

An der Welle 5
Frankfurt am Main, 60322
Germany

University of Hamburg ( email )

Allende-Platz 1
Hamburg, 20146
Germany

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