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Total Posts: 42
Joined: May 2006
Posted: 2017-03-28 15:34
I am wondering how to make an intuitive (at least to folks in the systematic strategies business) argument about the extent to which three active strategies – carry, value and momentum/trend, each applied across the main asset classes – together “span the space” of risk factors. For our purposes, let’s define the universe of risk factors to be: bond risk premium (RP), equity RP, credit RP, carry, value, momentum/trend, growth, inflation, skew, volatility and liquidity.

Could a convincing argument be made that relied on intuition versus math?

Thank you!


Total Posts: 216
Joined: Jan 2015
Posted: 2017-03-29 21:04
I don't think I understand the question. Why would it be desirable to span all risk factors:

"Johnson, could you tell us a little bit more about the risk profile of your new systematic strategy. What would you say are the major risk factors that it's exposed to?"
"I'm proud to say, all of them"

I think it's certainly desirable to be exposed to all major risk *premiums*. But not all risk factors have associated premiums. And even if they do, the size of those premiums may not justify the risk or cost of capital. To borrow from your list, what's the premium associated with inflation? Sometimes it's better to be long inflation, sometimes short. But there's no consistent historical evidence that one side consistently out-performs the other over the long-term.

I'd rather have a strategy that, while harvesting maximum returns, is as exposed to as few risk factors as possible.


Total Posts: 117
Joined: Jul 2013
Posted: 2017-04-07 19:57
If I understood the question (big if...) you could tell how these 3 styles are exposed to risk factors that are perhaps zero o negatively correlated to each other.
I think you are confusing styles with risk factors a lot.

"amicus Plato sed magis amica Veritas"
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