Why Are High Exposures to Factor Betas Unlikely to Deliver Anticipated Returns?

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See all articles by Chris Brightman

Chris Brightman

Research Affiliates, LLC

Forrest Henslee

Research Affiliates, LLC

Vitali Kalesnik

Research Affiliates Global Advisors

Feifei Li

Research Affiliates, LLC

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: January 11, 2021

Abstract

By choosing investment strategies that intentionally create exposure to factor betas, investors may be obtaining uncompensated risks. We show across a wide variety of factors and geographical markets that factors constructed from fundamental characteristics have earned high returns, whereas those constructed from statistical betas have earned returns close to zero. When designing factor-based investment strategies, investors should seek exposure to the fundamental characteristics that define a factor and use statistical measures of factor betas to manage factor risks. Conversely, seeking to gain exposure to factor betas is a misguided means of obtaining the returns available from factor investing.

Keywords: Factor Portfolios, Risk Factors, Characteristics, Covariances

JEL Classification: G00, G11, G12, G40

Suggested Citation

Brightman, Chris and Henslee, Forrest and Kalesnik, Vitali and Li, Feifei and Linnainmaa, Juhani T., Why Are High Exposures to Factor Betas Unlikely to Deliver Anticipated Returns? (January 11, 2021). Available at SSRN: https://ssrn.com/abstract=

Chris Brightman

Research Affiliates, LLC ( email )

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Forrest Henslee

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

Vitali Kalesnik (Contact Author)

Research Affiliates Global Advisors ( email )

16 Berkeley Street
London, W1J 8DZ
United Kingdom
+44 2039299880 (Phone)

HOME PAGE: http://https://www.researchaffiliates.com/en_us/home.html

Feifei Li

Research Affiliates, LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8753 (Phone)
949-325-8953 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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