Equity factor investing calls risk techniques into question
Investors, surveyed by EDHEC- Risk Institute and ERI Scientific Beta, have revealed that there is a contradiction between score-based factor design choices and the statistical beta-based risk analysis.
The analysis of the extreme risk of factor portfolios additionally proved to be still ‘fairly basic’ and therefore it did not allow the extreme risks to be appreciated.
Other key findings showed that multi-factor strategies tended to be implemented in a passive investment context, even though factor investing was based on risk management rather than active views of returns.
According to the investment professionals who participated in the survey the score-based approach still dominated.
The survey also found that investors had a good understanding of the conditionality of factors’ exposures to the market and the usefulness of measuring and controlling market beta.
However, most investors believed they had poor control of the sophisticated techniques for measuring and integrating the variations in betas and premia in the allocation when it came to evaluating their control of dynamic factor investing.
Professor Noel Amenc, who is also ERI Scientific Beta’s chief executive, said: “While investor interest in dynamic factor investing is growing, it should be recognised that the techniques used for risk measurement or risk control do not yet correspond to the state of the art.
“In the same way, in spite of the lack of academic or empirical evidence supporting factor timing, is i favoured by a considerable share of investors, and within this framework, approaches are used that lack sophistication and are not necessarily appropriate for capturing factor premia regimes.”
AUTHOR
Oksana Patron
Recommended for you
BlackRock has announced its plan to acquire real estate investment firm ElmTree Funds which will be integrated into its new private financing solutions business.
With share price growth of 45 per cent for FY25, Australian Ethical has shared why it believes the firm has done so well compared to its active peers.
ETF investors would be wise to consider global or European exposure for their equity ETF allocations, according to AXA IM, with US government action expected to hit both its equity and bond performance.
A specialist ETF provider is seeking to become “the new Betashares” with its active ETFs, thanks to its use of algorithms to achieve outperformance.
