How Design Choices Impact Low Risk Factor Performance

Insights by Alex Botte , Pushkar Agrawal , Mike Nigro
A new Street View investigates how factor construction can impact performance.

When it comes to the construction of risk factors, seemingly innocuous specification details can have a surprisingly large impact on the factor’s performance. During the COVID market crisis earlier this year, “Low Risk” factors and strategies* exhibited meaningfully different performance depending on the design choices made by various providers.

In this Street View, we explore five such design choices and measure their impact on the Low Risk factor’s performance.

We find that one particular design choice had significant performance impact because of its persistent relationship with another risk factor. This has important implications for asset allocators that use Low Risk factors to analyze the performance of their portfolios and/or investment managers.

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* Low Risk factors and strategies are those that buy or overweight low risk stocks and sell or underweight high risk stocks.

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