PT  - JOURNAL ARTICLE
AU  - David Blitz
AU  - Thom Marchesini
TI  - The Capacity of Factor Strategies
AID  - 10.3905/jpm.2019.1.089
DP  - 2019 Aug 30
TA  - The Journal of Portfolio Management
PG  - 30--38
VI  - 45
IP  - 6
4099  - https://pm-research.com/content/45/6/30.short
4100  - https://pm-research.com/content/45/6/30.full
AB  - 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