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Alice in Factorland

Factor tilt strategies have generally produced less alpha in live portfolios compared to theoretical factor long–short paper portfolios and have largely been unsuccessful in replicating smart beta strategies. End-investors, consequently, often reap a much smaller return from factor exposure than they expect. The winning approach to factor investing is buying the losers: Past negative performance appears to be predictive of positive future returns. 


The Incredible Shrinking Factor Return

By Rob Arnott Vitali Kalesnik Lillian Wu

April 2017

Managers who favor high factor loadings on market beta, value, or momentum generally do not derive nearly as much incremental return as theoretical factor return histories would suggest, and the culprit appears to be the real-world costs of implementation.

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(VIDEO) Alice in Factorland and the Incredible Shrinking Factor Return
Research by Rob Arnott, Vitali Kalesnik, and Lillian Wu shows that factor-tilt strategies suffer from substantial return slippage (vs. factor long–short paper portfolios) due to the real-world costs of implementation.

Visual Insights

Managers experience slippage in their ability to capture factor returns.


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