Scientific Beta

Financial Investigator: "Comparing ‘top-down’ multi-factor approaches with ‘bottom-up’ score-weighting approaches that target high factor intensity, we find that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia. (...) ‘Top-down’ multi-factor portfolios blend single-factor portfolios to draw on differentiated sources of returns while reducing the conditionality of performance. The approach is simple and transparent and affords flexible factor-by-factor control of multi-factor allocation, which makes it possible to serve diverse needs through different combinations of the same building blocks and allows for dynamic strategies."

Financial Investigator June 2017

Article by Felix Goltz, Head of Applied Research, EDHEC-Risk Institute, Research Director, ERI Scientific Beta.

"(...) Comparing ‘top-down’ multi-factor approaches with ‘bottom-up’ score-weighting approaches that target high factor intensity, we find that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia. (...) ‘Top-down’ multi-factor portfolios blend single-factor portfolios to draw on differentiated sources of returns while reducing the conditionality of performance. The approach is simple and transparent and affords flexible factor-by-factor control of multi-factor allocation, which makes it possible to serve diverse needs through different combinations of the same building blocks and allows for dynamic strategies. Its tractability and granularity also facilitate performance analysis, attribution and reporting. Typically assembled from reasonably diversified factor sleeves, ‘top-down’ multi-factor portfolios tend to result in portfolios with large effective numbers of stocks and thus good diversification of idiosyncratic risk. (...)"