RESEARCH: FACTOR EXPOSURE

THE COMPLEXITY OF FACTOR EXPOSURE ANALYSIS

  • Factor exposure analysis is essential for performance and risk contribution
  • However, the results vary depending on methodologies, factor definitions, and other assumptions
  • A holdings-based approach is preferable over regression analysis

REPLICATING FAMOUS HEDGE FUNDS

  • Diverse hedge fund strategies can be replicated via factor-mimicking portfolios
  • The analysis highlights that most returns are explained by factors, not alpha
  • However, hedge funds can create value by harvesting factor returns efficiently via portfolio construction

WARREN BUFFETT: THE GREATEST FACTOR INVESTOR OF ALL TIME?

  • A factor exposure of Berkshire Hathaway reveals structural factor tilts
  • Long Value, Size, Quality, and Low Volatility factors and short Growth and Dividend Yield
  • Warren Buffet generated little alpha, but is highly skilled at harvesting factor returns

WHITE PAPER: FACTOR OPTIMISATION

  • Equity factors exhibit sector biases and exposures to other common factors
  • A factor optimisation process allows investors to create pure factors
  • Risk-adjusted returns do not increase, but pure factors are attractive from analytical, risk and allocation perspectives

FACTOR EXPOSURE: SMART BETA ETFS VS MUTUAL FUNDS

  • Investors can express factor views via smart beta ETFs or mutual funds
  • Some mutual funds offer higher factor exposure than smart beta ETFs
  • Given higher fees, strong views on expected factor performance are required

FACTOR EXPOSURE ANALYSIS: DOW JONES

  • Factor exposure should be considered a source of returns as well as of risk
  • Factor biases can be measured top-down or bottom-up
  • The results of the two approaches do not necessarily reconcile

HEDGE FUND FACTOR EXPOSURE & ALTERNATIVES

  • Equity hedge fund returns have been disappointing over the last 14 years
  • An exposure analysis shows no structural factor exposure, but frequent factor rotation
  • Multi-factor long-short products are an interesting alternative, depending on the fee level

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