Tradable Risk Factors for Institutional and Retail Investors

66 Pages Posted: 24 Sep 2020 Last revised: 15 Aug 2022

See all articles by Andreas Johansson

Andreas Johansson

Lund University School of Economics and Management

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: May 5, 2020

Abstract

We construct tradable, long-short risk factors using combinations of large and liquid mutual funds (long leg) and ETFs (long and short legs), based on their holdings, for both retail and institutional investors. Exploiting a novel dataset, our tradable factors explicitly take into account ETF shorting costs and the capacity constraints of factor strategies. The tradable risk factors constitute valid benchmarks to evaluate portfolio managers and trading strategies, and they perform differently from "on-paper" risk factors (2% to 5% per year) due to implementation frictions in the short leg.

Keywords: Smart beta, factor investing, tradable factors, shorting costs, borrowing fees

JEL Classification: G11, G12

Suggested Citation

Johansson, Andreas and Sabbatucci, Riccardo and Tamoni, Andrea, Tradable Risk Factors for Institutional and Retail Investors (May 5, 2020). Swedish House of Finance Research Paper No. 20-21, Available at SSRN: https://ssrn.com/abstract=3594064 or http://dx.doi.org/10.2139/ssrn.3594064

Andreas Johansson

Lund University School of Economics and Management ( email )

Lund
+46 (0)46 222 00 00 (Phone)

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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