PT  - JOURNAL ARTICLE
AU  - Rob Arnott
AU  - Campbell R. Harvey
AU  - Vitali Kalesnik
AU  - Juhani Linnainmaa
TI  - Alice’s Adventures in Factorland: <em>Three Blunders That Plague Factor Investing</em>
AID  - 10.3905/jpm.2019.45.4.018
DP  - 2019 Mar 31
TA  - The Journal of Portfolio Management
PG  - 18--36
VI  - 45
IP  - 4
4099  - https://pm-research.com/content/45/4/18.short
4100  - https://pm-research.com/content/45/4/18.full
AB  - Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors. First, many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns. Second, for investors using naive risk management tools, factor returns can experience downside shocks far larger than would be expected. Finally, investors are often led to believe their factor portfolio is diversified. Diversification can vanish, however, in certain economic conditions when factor returns become much more correlated. Factor investing is a powerful tool, but understanding the risks involved is essential before adopting this investment framework.TOPICS: Analysis of individual factors/risk premia, performance measurement, risk management, portfolio construction