How Inefficient is the 1/N Strategy for a Factor Investor?

Forthcoming, Journal of Investment Management

26 Pages Posted: 9 Jan 2023

See all articles by Kevin Khang

Kevin Khang

The Vanguard Group, Inc.

Antonio Picca

Goldman Sachs Group, Inc.

Shaojun Zhang

The Ohio State University

Minzhi Zhu

The Vanguard Group, Inc.

Date Written: November 26, 2021

Abstract

The last decade’s dramatic democratization of factor investing has broadened its investor base to individual investors and their advisors. This paper studies the performance of classic allocation strategies—1/N, mean-variance, and minimum-variance—from these investors’ perspective. Specifically, we curate commonly available long-only factor funds, adjust their premia for transaction costs, impose sensible concentration limits, and explicitly focus on active risk-and- return properties. Block bootstrap-based simulation shows that no alternative optimization strategy consistently dominates the simple 1/N strategy in active returns and information ratios. 1/N allocation appears a sensible strategic allocation for most factor investors without an edge in predicting factor premium.

Keywords: Asset Allocation; Factor Investing; Portfolio Construction; Portfolio Optimization

Suggested Citation

Khang, Kevin and Picca, Antonio and Zhang, Shaojun and Zhu, Minzhi, How Inefficient is the 1/N Strategy for a Factor Investor? (November 26, 2021). Forthcoming, Journal of Investment Management, Available at SSRN: https://ssrn.com/abstract=3972442 or http://dx.doi.org/10.2139/ssrn.3972442

Kevin Khang

The Vanguard Group, Inc. ( email )

100 Vanguard Blvd
Malvern, PA 19355
United States

Antonio Picca

Goldman Sachs Group, Inc. ( email )

85 Broad Street
New York, NY 10004
United States

Shaojun Zhang (Contact Author)

The Ohio State University

2100 Neil Avenue
Columbus, OH 43210-1144
United States

HOME PAGE: http://sites.google.com/view/zhangshaojun

Minzhi Zhu

The Vanguard Group, Inc. ( email )

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