PT  - JOURNAL ARTICLE
AU  - Daniel Y. Lam
AU  - Wai Lee
TI  - Factor Neutrality
AID  - 10.3905/jpm.2005.599495
DP  - 2005 Oct 31
TA  - The Journal of Portfolio Management
PG  - 38--48
VI  - 32
IP  - 1
4099  - https://pm-research.com/content/32/1/38.short
4100  - https://pm-research.com/content/32/1/38.full
AB  - Investors have views on both factor returns and stock-specific returns, and the results they achieve may reflect both return components to varying degrees. Attempting to eliminate the impact of a particular factor may not be desirable. Application of an analytical framework to consider the potential deterioration in investment performance suggests a substantial loss in information ratio due to enforcement of factor neutrality, particularly with a limited number of stocks in a portfolio, as is often the case in the real world. The IR may be affected even if all information available is on stock-specific returns, when different universes are used to estimate the factor structure and to construct the portfolio. Maintaining factor neutrality can be suboptimal.