TY - JOUR T1 - Mitigating the Hidden Risks of Factor Investing JF - The Journal of Portfolio Management DO - 10.3905/jpm.2022.1.454 SP - jpm.2022.1.454 AU - Rob Arnott AU - Vitali Kalesnik AU - Lillian Wu Y1 - 2022/12/10 UR - https://pm-research.com/content/early/2022/12/10/jpm.2022.1.454.abstract N2 - Several hidden risks of factor investing can lead to investor disappointment; even diversified baskets of factors are prone to sharp drawdowns and prolonged periods of underperformance. Accordingly, the authors explore a variety of techniques to improve the risk-adjusted returns of individual factors and factor portfolios. Introducing a new two-step volatility management method that adjusts the length of the estimation window to scale factor returns, the authors find that this technique is effective in improving both risk-adjusted returns and the trade-off between performance improvement and turnover characteristics. Ultimately, coupling this novel two-step approach with an optimization technique that captures both volatility and correlation information leads to improved risk-adjusted performance, lower volatility of volatility, and improved kurtosis and drawdown characteristics. ER -