Do Institutional Investors Manage Factor Exposures Strategically?

66 Pages Posted: 6 Sep 2019

See all articles by Dirk Broeders

Dirk Broeders

De Nederlandsche Bank; Maastricht University

Kristy A.E. Jansen

Tilburg University; De Nederlandsche Bank - Research Department

Date Written: September 1, 2019


Do institutional investors manage factor exposures at the asset class level strategically? This is a key asset and risk management question because factor exposures significantly contribute to return and risk. We answer the question by an empirical assessment of (un)conditional factor exposures of large institutional investors using proprietary data on occupational pension plans. The answer depends on the asset class. Based on two key findings we claim that pension funds manage equity factor exposures strategically. First, value, momentum, carry, and low beta factors contribute significantly to cross-sectional heterogeneity in unconditional equity returns. Second, time variation in conditional factor exposures for equities is limited. By contrast, support for strategic decision-making in fixed income factor exposures cannot be found. Market exposures drive the heterogeneity in unconditional fixed income returns, and the time variation in conditional factor exposures is much larger than strategic decision-making suggests. The average fixed income factor exposures can get as low as -0.6 and as high as 0.8. We also find that exogenous events and pension fund characteristics influence factor exposures through regulations. A high funding ratio and a high fraction of retirees to total participants lowers market exposures and increases exposures to credit risk, carry, and low beta. Furthermore, size does not influence factor exposures while delegated asset managers do.

Keywords: factor exposures, institutional investors, portfolio risk, regulations, returns

JEL Classification: G11, G23

Suggested Citation

Broeders, Dirk and Jansen, Kristy A.E., Do Institutional Investors Manage Factor Exposures Strategically? (September 1, 2019). Available at SSRN: or

Dirk Broeders

De Nederlandsche Bank ( email )

P.O. Box 98
Amsterdam, 1000 AB


Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD

HOME PAGE: http://

Kristy A.E. Jansen (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC 5000 LE

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics