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Factor investing for diversification purposes?

Factor investing for diversification purposes?

20-05-2015 | From the field
  • David Blitz
    Head of Quant Research

A paper* argues that size, value, momentum and other factor portfolios might be considered as alternative building blocks for strategic asset allocation, because these offer an attractive risk premium and powerful diversification benefits.

Although we agree with the suggestion to consider factor strategies, we believe that the long/short portfolios proposed in the paper are probably too extreme, and also not particularly cost-effective for most investors. Instead, we would recommend that investors first consider replacing their traditional capitalization-weighted equity portfolios with a combination of long-only value, momentum and low-volatility portfolios.**

From a long-only perspective it also becomes clear that the main benefit of factor investing is an improved risk-adjusted return, rather than improved diversification.

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From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

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