Multi-factor portfolio construction has had to contend with a double whammy of structural headwinds. The first relates to the extent to which factor return characteristics have been impacted by changes to both the market structure and economic regime backdrop over the last 40+ years. This has exposed portfolio construction and analysis to significant anchoring bias risk. The second headwind is a function of the compounding impact that the incorporation of substantial unintended exposures embedded in typical factor methodologies has injected into multi-factor portfolios.
We examine how these headwinds have resulted in the evolution in multi-factor construction methodology and the importance of utilizing ‘Pure’ factor rather than traditional factor calculation.
