RT Journal Article SR Electronic T1 Alice’s Adventures in Factorland: Three Blunders That Plague Factor Investing JF The Journal of Portfolio Management FD Institutional Investor Journals SP 18 OP 36 DO 10.3905/jpm.2019.45.4.018 VO 45 IS 4 A1 Rob Arnott A1 Campbell R. Harvey A1 Vitali Kalesnik A1 Juhani Linnainmaa YR 2019 UL https://pm-research.com/content/45/4/18.abstract AB Factor investing has failed to live up to its many promises. Its success is compromised by three problems that are often underappreciated by investors. First, many investors develop exaggerated expectations about factor performance as a result of data mining, crowding, unrealistic trading cost expectations, and other concerns. Second, for investors using naive risk management tools, factor returns can experience downside shocks far larger than would be expected. Finally, investors are often led to believe their factor portfolio is diversified. Diversification can vanish, however, in certain economic conditions when factor returns become much more correlated. Factor investing is a powerful tool, but understanding the risks involved is essential before adopting this investment framework.TOPICS: Analysis of individual factors/risk premia, performance measurement, risk management, portfolio construction