Financial Analysts Journal September/October 2016 Volume 72 Issue 5
Will Your Factor Deliver? An Examination of Factor Robustness and Implementation Costs
Abstract
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, chairman, and chief investment officer of Rayliant Global Advisors, a global investment management group specializing in quantamental Chinese equity strategies. He also co-founded Research Affiliates, a leader in smart beta and asset allocation. Mr. Hsu is an adjunct professor in finance at the UCLA Anderson School of Management and a visiting professor at Tsinghua University, Kyoto University, and Taiwan National Chengchi University. He is on the editorial board of the Financial Analysts Journal, the Journal of Investment Management, the Journal of Investment Consulting, and the Journal of Index Investing. Mr. Hsu has published more than 40 journal articles and is a contributing author of nine handbooks in finance and economics. He has won three Graham and Dodd Awards, one FAJ Readers’ Choice Award, three Bernstein Fabozzi/Jacobs Levy Outstanding Research Awards, and three William Sharpe Best Research Awards. 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 senior member of the investment team at Research Affiliates, leading research and business strategy in the European region. Previously, Dr. Kalesnik led the equity research team, and he continues to perform general equity-related research. Dr. Kalesnik has co-authored articles that were recognized with three Graham and Dodd Scroll Awards, a Financial Analysts Journal Readers’ Choice Award, a William F. Sharpe Indexing Achievement Award, a Bernstein Fabozzi/Jacobs Levy Award, and a Graham and Dodd Award for "What is Quality." His research strengthens and expands Research Affiliates’ products—in particular, the RAFI Fundamental Index strategies—and supports the firm’s global tactical asset allocation products. He speaks fluent English, Russian, and French. Dr. Kalesnik earned a PhD in economics from the University of California, Los Angeles, where he was a winner of the UCLA Graduate Division Fellowship.