The multifactor investing framework has become very popular in the indexing community. Both academic and practitioner researchers have documented hundreds of equity factors. But which of these factors are likely to profit investors once implemented? We find that many of the documented factors lack robustness. Size and quality, two of the more prominent factors, show weak robustness, whereas value, momentum, illiquidity, and low beta are more robust. Further examining implementation characteristics, we find that liquidity-demanding factors, such as illiquidity and momentum, are associated with significantly higher trading costs than are other factors. Investors may be better off accessing these factors through active management rather than indexation.
About the Author(s)
Jason Hsu is founder and chief investment officer of Rayliant Global Advisors, a Hong Kong–based investment management group specializing in emerging market equity strategies, especially in Greater China. He co-founded Research Affiliates, an investment manager specializing in smart beta indexes and asset allocation. In addition, Mr. Hsu is an adjunct professor in finance at the UCLA Anderson School of Management in the US, and a visiting professor at Tsinghua University in Beijing, Kyoto University in Kyoto, and National Chengchi University in Taipei. He is on the editorial board of the CFA Institute Financial Analysts Journal®, the Journal of Investment Management, the Journal of Investment Consulting, and the Journal of Index Investing. Mr. Hsu has authored more than 40 journal articles and is a contributing author for eight handbooks in finance and economics. He has won two Graham and Dodd Scroll Awards from the Financial Analysts Journal, two Bernstein Fabozzi/Jacobs Levy Outstanding Research Awards, and three William Sharpe Best Research Awards. Mr. Hsu has been recognized by Institutional Investor as one of the 20 rising stars of the industry. He also co-invented the Fundamental Index, which won best index from Global Pensions magazine for three consecutive years. Mr. Hsu received a bachelor of science degree from Caltech, a master of science degree from Stanford University, and a PhD in finance from the UCLA Anderson School of Management.
Vitali Kalesnik is a partner and the director of research for Europe at Research Affiliates Global Advisors (Europe), Limited, in London.