@article {Blitzjpm.2019.1.089, author = {David Blitz and Thom Marchesini}, title = {The Capacity of Factor Strategies}, elocation-id = {jpm.2019.1.089}, year = {2019}, doi = {10.3905/jpm.2019.1.089}, publisher = {Institutional Investor Journals Umbrella}, abstract = {The rapidly growing popularity of factor investing raises questions about the capacity of factor-based strategies. In this article, the authors show that widely used factor indexes face severe capacity constraints as a result of concentrating all their trades on just a handful of rebalancing moments each year. They argue that the key to unlocking a high capacity is efficiently using the liquidity offered by the market throughout the year. This is illustrated with a simulation experiment in which the trades of standard factor indexes are simply spread over a longer period. Although this naive approach uses stale information, no loss in performance is observed and trade feasibility, and hence capacity, show spectacular improvement.TOPICS: Factor-based models, style investing, analysis of individual factors/risk premia}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/early/2019/08/27/jpm.2019.1.089}, eprint = {https://jpm.pm-research.com/content/early/2019/08/27/jpm.2019.1.089.full.pdf}, journal = {The Journal of Portfolio Management} }