RT Journal Article
SR Electronic
T1 The Capacity of Factor Strategies
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP jpm.2019.1.089
DO 10.3905/jpm.2019.1.089
A1 David Blitz
A1 Thom Marchesini
YR 2019
UL https://pm-research.com/content/early/2019/07/04/jpm.2019.1.089.abstract
AB The rapidly growing popularity of factor investing raises questions about the capacity of factor-based strategies. In this article, the authors show that widely used factor indexes face severe capacity constraints as a result of concentrating all their trades on just a handful of rebalancing moments each year. They argue that the key to unlocking a high capacity is efficiently using the liquidity offered by the market throughout the year. This is illustrated with a simulation experiment in which the trades of standard factor indexes are simply spread over a longer period. Although this naive approach uses stale information, no loss in performance is observed and trade feasibility, and hence capacity, show spectacular improvement.TOPICS: Factor-based models, style investing, analysis of individual factors/risk premia