Scientific Beta

Funds Europe: "The choice of meaningful factors and the proxies for them at the investment level are considered by the EDHEC-Risk Institute. The article also considers multi-factor investing."

Funds Europe October 2015

"(…) The choice of meaningful factors and the proxies for them at the investment level are considered by the EDHEC-Risk Institute. The article also considers multi-factor investing. ‘Factor investing’ recommends that allocation decisions be expressed in terms of risk factors, as opposed to standard asset class decompositions. While intuitively appealing, this approach poses a major challenge, namely the choice of the meaningful factors and the corresponding investable proxies. In simple terms, factor investing regards each constituent in an investor’s portfolio, and therefore the whole portfolio as a bundle of factor exposures. There are as many factors as individual securities and the factors are themselves portfolios of such securities, so thinking in terms of factors is strictly equivalent to thinking in terms of asset classes, and therefore would not add any value. More relevant is the situation where a parsimonious factor model is used, with a number of factors smaller than the number of constituents. (...)"