TY - JOUR T1 - Practical Applications of Accounting for Cross-Factor Interactions in Multi-Factor Portfolios without Sacrificing Diversification and Risk Control JF - Practical Applications SP - 1 LP - 5 DO - 10.3905/pa.5.3.249 VL - 5 IS - 3 AU - Noël Amenc AU - Frédéric Ducoulombier AU - Mikheil Esakia AU - Felix Goltz AU - Sivagaminathan Sivasubramanian Y1 - 2018/01/31 UR - https://pm-research.com/content/5/3/1.7.abstract N2 - Increasing investor interest in multi-factor solutions has product providers debating the respective merits of the “top-down” and “bottom-up” approaches to multi-factor portfolio construction. In Accounting for Cross-Factor Interactions in Multi-Factor Portfolios without Sacrificing Diversification and Risk Control, published in the 2017 Special Issue of The Journal of Portfolio Management, Noël Amenc, Frédéric Ducoulombier, Mikheil Esakia, Felix Goltz, and Sivagaminathan Sivasubramanian at ERI Scientific Beta compare the two strategies. They find that focusing on increasing composite factor scores through score-based weighting leads to inefficiency in capturing factor premia. High factor scores in score-weighted bottom-up approaches also come with high instability and turnover.The team introduces a hybrid approach that considers cross-factor interactions in top-down portfolios through an adjustment at the stock-selection level. The approach produces significantly higher factor intensity and improves absolute performance and risk-adjusted performance relative to the traditional approach while keeping turnover in check. ER -