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Active Factor Completion Strategies

Hubert Dichtl, Wolfgang Drobetz, Harald Lohre and Carsten Rother
The Journal of Portfolio Management Quantitative Special Issue 2021, jpm.2020.1.193; DOI: https://doi.org/10.3905/jpm.2020.1.193
Hubert Dichtl
is managing director at Dichtl Research & Consulting in Bad Soden, Germany, and a lecturer at the University of Hamburg in Hamburg, Germany
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Wolfgang Drobetz
is a professor of finance at the University of Hamburg in Hamburg, Germany
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Harald Lohre
is director of research at Invesco Quantitative Strategies in Frankfurt, Germany, a fellow of the Centre for Endowment Asset Management (CEAM), Cambridge Judge Business School, University of Cambridge, UK, and a visiting research fellow at the Centre for Financial Econometrics, Asset Markets and Macroeconomic Policy (EMP) at the Lancaster University Management School in Lancaster, UK
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Carsten Rother
is a research analyst at Invesco Quantitative Strategies in Frankfurt, Germany, and a doctoral student at the University of Hamburg in Hamburg, Germany
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Abstract

Embracing the concept of factor investing, the authors design a flexible framework for building out different factor completion strategies for traditional multi-asset allocations. Their notion of factor completion comprises a maximally diversified reference portfolio anchored in a multi-asset multi-factor risk model that acknowledges market factors such as equity, duration, and commodity, as well as style factors such as carry, value, momentum, and quality. The specific nature of a given factor completion strategy varies with investor preferences and constraints. The authors tailor a select set of factor completion strategies that include factor-based tail hedging, constrained factor completion, and a fully diversified multi-asset multi-factor proposition. Their framework is able to organically exploit tactical asset allocation signals without sacrificing the notion of maximum diversification. To illustrate, the authors additionally embed the common trend style that permeates many asset classes, and they also include the notion of style factor momentum.

TOPICS: Factor-based models, portfolio management/multi-asset allocation, style investing

Key Findings

  • ▪ The authors design a flexible framework for building out different factor completion strategies for traditional multi-asset allocations using a maximally diversified reference portfolio anchored in a multi-asset multi-factor risk model comprising market as well as style factors.

  • ▪ The authors tailor a select set of factor completion strategies that include factor-based tail hedging, constrained factor completion, and a fully diversified multi-asset multi-factor proposition.

  • ▪ Their framework is able to organically exploit tactical asset allocation signals without sacrificing the notion of maximum diversification, demonstrated by embedding the common trend style in asset classes as well as style factor momentum.

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The Journal of Portfolio Management: 48 (8)
The Journal of Portfolio Management
Vol. 48, Issue 8
Emerging Markets 2022
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Active Factor Completion Strategies
Hubert Dichtl, Wolfgang Drobetz, Harald Lohre, Carsten Rother
The Journal of Portfolio Management Nov 2020, jpm.2020.1.193; DOI: 10.3905/jpm.2020.1.193

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Active Factor Completion Strategies
Hubert Dichtl, Wolfgang Drobetz, Harald Lohre, Carsten Rother
The Journal of Portfolio Management Nov 2020, jpm.2020.1.193; DOI: 10.3905/jpm.2020.1.193
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  • Article
    • Abstract
    • THE CASE FOR MULTI-ASSET MULTI-FACTOR INVESTING
    • DIVERSIFIED RISK PARITY FOR MAXIMUM DIVERSIFICATION
    • Search for Low-Correlated Factors
    • FACTOR COMPLETION STRATEGIES
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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