Stop blaming factors and just look at your non-factor risks

The recent poor performance of factor strategies has been blamed on flows into these strategies ultimately cancelling out their benefits. In fact, the recent performance of factor strategies that have had well-balanced exposure to long-term rewarded factors has not been driven by the performance of the underlying factors but by non-factor risks. Non-factor risks are the undesired consequences of explicit choices of factor exposure or weighting schemes. Risk factors are never orthogonal with other forms of implicit risks. When these implicit risk choices are not anticipated and controlled, they have significant consequences for the risk and performance profiles of factor strategies and can lead to strong differences in performance and risk for the same choice of factors over a given period. In this webinar, we examine a number of non-factor risks that have been important drivers of short-term performance. Scientific Beta offers investors an option to control for these implicit risks, but it is important to realise that the choice on managing these risks is a key fiduciary decision that needs to be taken by the investors themselves.