RT Journal Article
SR Electronic
T1 Why Are High Exposures to Factor Betas Unlikely to Deliver Anticipated Returns?
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP jpm.2021.1.310
DO 10.3905/jpm.2021.1.310
A1 Chris Brightman
A1 Forrest Henslee
A1 Vitali Kalesnik
A1 Feifei Li
A1 Juhani Linnainmaa
YR 2021
UL https://pm-research.com/content/early/2021/11/16/jpm.2021.1.310.abstract
AB By choosing investment strategies that intentionally create exposure to factor betas, investors may be obtaining uncompensated risks. The authors show, across a wide variety of factors and geographical markets, that factors constructed from fundamental characteristics have earned high returns, whereas those constructed from statistical betas have earned returns close to zero. When designing factor-based investment strategies, investors should seek exposure to the fundamental characteristics that define a factor and use statistical measures of factor betas to manage factor risks. Conversely, seeking to gain exposure to factor betas is a misguided means of obtaining the returns available from factor investing.Key Findings▪ We show that factors constructed from fundamental characteristics have earned high returns, whereas those constructed from statistical betas have earned returns close to zero.▪ Seeking to obtain exposure to factor betas is a misguided means to obtain the returns available from factor investing. By choosing investment strategies to intentionally create exposure to factor betas, investors may be gaining exposure to uncompensated risks. ▪ When designing factor-based investment strategies, investors should seek exposure to the fundamental characteristics that define a factor and use statistical measures of factor betas to manage factor risks.