Scientific Beta

Top 1000 Funds: "Here, we’ll contrast the claims of the proponents of bottom-up approaches with relevant findings in the academic literature. First, we’ll review general insights on return estimation and factor models that are relevant for multi-factor portfolio construction. Then, we’ll discuss recent literature that specifically addresses issues with bottom-up approaches."

Top 1000 Funds 01/02/2018

Article by Felix Goltz, research director, and Sivagaminathan Sivasubramanian, quantitative analyst, at ERI Scientific Beta.

"(...) Providers of multi-factor indices have recently been debating the respective merits of the top-down and bottom-up approaches to multi-factor portfolio construction. Top-down approaches assemble multi-factor portfolios by combining distinct silos for each factor. Bottom-up methods build multi-factor portfolios in a single pass by choosing and/or weighting securities based on a composite measure of multi-factor exposures. (...) Here, we’ll contrast the claims of the proponents of bottom-up approaches with relevant findings in the academic literature. First, we’ll review general insights on return estimation and factor models that are relevant for multi-factor portfolio construction. Then, we’ll discuss recent literature that specifically addresses issues with bottom-up approaches. (...)"