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
Date Written: February 25, 2020
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: Suggested Citation