Practical Applications of Implementation Matters: Relaxing Constraints Can Improve the Potential Returns of Factor Strategies

Practical Applications Summary

In Implementation Matters: Relaxing Constraints Can Improve the Potential Returns of Factor Strategies, which appeared in the 2019 Quantitative Special Issue of The Journal of Portfolio Management, Jack Davies, Dave Gibbon, Sara Shores, and Josephine Smith (all of BlackRock, Inc.) investigated the differences in the performance of various factor strategy portfolios when investment constraints were placed on investment vehicles. They created several hypothetical portfolios based on momentum and value strategies, and imposed constraints representative of five types of investment vehicles: private funds, UCITS, 130/30 funds, long-only funds, and long-only ETF. The authors found that, in general, the hypothetical implementations with fewer constraints performed better. These findings suggest that investors should pay attention to the real-world restrictions placed on the investment vehicles they choose when pursuing style-factor investment strategies.

TOPICS: Analysis of individual factors/risk premia, factor-based models