Excess Returns, Episode 3: Six Common Misconceptions About Factor-Based Strategies

Factor strategies have grown exponentially in the past decade. Almost every major asset manager now offers their variation of things like value, momentum, quality, and low volatility. But to use them properly, it is important to understand what they can and can’t do. In this week’s episode, we discuss the common misconceptions about factor strategies and what they can deliver for investors. 

We discuss the following myths:

  1. Factor strategies are less risky than the market
  2. Three- and five-year periods are the best for judging performance
  3. The biggest key to performance is the strategy itself
  4. The past is always predictive of the future
  5. Factor strategies are free of human emotion

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Included below are our show notes, which are links off to articles and sources discussed during the podcast:

Jack’s article: Six Common Misconceptions About Factor-Based Strategies

Value Stocks and Struggles

Probability of Factor Underperformance

Importance to comparing to the right benchmark

AQR Paper: Fact, Fiction, and the Size Effect

Validea’s Piotroski and Mohanram-based models