RT Journal Article
SR Electronic
T1 Implementation Matters: <em>Relaxing Constraints Can Improve the Potential Returns of Factor Strategies</em>
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 101
OP 114
DO 10.3905/jpm.2019.45.3.101
VO 45
IS 3
A1 Jack Davies
A1 Dave Gibbon
A1 Sara Shores
A1 Josephine Smith
YR 2019
UL https://pm-research.com/content/45/3/101.abstract
AB 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%.TOPICS: Analysis of individual factors/risk premia, factor-based models, real assets/alternative investments/private equity