The question I get asked the most during the past twelve months is “Why are factors not working?” Here are my top 12 personal thoughts on the topic—informed by 15+ years of successfully “factor investing”.
1. There is no such thing as factor investing.
Here are my 8-thoughts and 1 solution idea about Campbell Harvey and Yan Liu recently released paper on their influential concept of the factor zoo. To sum it up, it says that there are too many data-mined factors out there and that we should be using much higher t-statistics to accept factors.
What is the most significant risk in quant (and all active) investing today?
They can’t do each other’s jobs well.
They can’t show up to each other’s office on Monday morning and pick up where the other one left off.
In Finance, Asset managers often hit this wall: “Alpha Is So Hard”.
Everyone knows everything. All the information is in the price. All the ideas have been explored. All the data has been discovered. The market is impossible to beat. Alpha is dead…
The first risk of investing is the Drawdown Risk - the loss from the peak. The second risk of investing is the Low Return Risk - the under-performance vs. expectations over a stretched period of time.