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Implementation Matters: Relaxing Constraints Can Improve the Potential Returns of Factor Strategies

Jack Davies, Dave Gibbon, Sara Shores and Josephine Smith
The Journal of Portfolio Management Quantitative Special Issue 2019, 45 (3) 101-114; DOI: https://doi.org/10.3905/jpm.2019.45.3.101
Jack Davies
is a vice president and portfolio manager for the Factor Based Strategies Group at BlackRock, Inc. in London, UK
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Dave Gibbon
is a managing director and head of investment strategy in EMEA for the Factor Based Strategies Group at BlackRock, Inc. in London, UK
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Sara Shores
is a managing director and the head of investment strategy for the Factor Based Strategies Group at BlackRock, Inc. in San Francisco, CA
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Josephine Smith
is a director and senior researcher for the Factor Based Strategies Group at BlackRock, Inc. in San Francisco, CA
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Abstract

Eligible investors seeking factor exposures may have a choice of different investment vehicles to implement an investment strategy, ranging from fully transparent, index-based exchange-traded funds to private funds or undertakings for collective investment in transferable securities. In this article, the authors assess the impact of constraints common to these investment vehicles through the lens of hypothetical equity momentum and value factor strategies. As constraints—leverage, trading frequency, and risk levels—on the factor strategies are relaxed, risk-adjusted potential returns may improve. Conversely, moving from an unconstrained implementation to a low-turnover, long-only implementation may decrease the Sharpe ratios of momentum and value strategies by as much as 60%.

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The Journal of Portfolio Management: 45 (3)
The Journal of Portfolio Management
Vol. 45, Issue 3
Quantitative Special Issue 2019
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Implementation Matters: Relaxing Constraints Can Improve the Potential Returns of Factor Strategies
Jack Davies, Dave Gibbon, Sara Shores, Josephine Smith
The Journal of Portfolio Management Feb 2019, 45 (3) 101-114; DOI: 10.3905/jpm.2019.45.3.101

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Implementation Matters: Relaxing Constraints Can Improve the Potential Returns of Factor Strategies
Jack Davies, Dave Gibbon, Sara Shores, Josephine Smith
The Journal of Portfolio Management Feb 2019, 45 (3) 101-114; DOI: 10.3905/jpm.2019.45.3.101
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  • Article
    • Abstract
    • HYPOTHETICAL FACTOR STRATEGIES
    • PERFORMANCE OF HYPOTHETICAL STRATEGIES IMPLEMENTED WITH DIFFERENT CONSTRAINTS
    • HOLDINGS AND LEVERAGE
    • CONCLUSION
    • ENDNOTES
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