The design of risk factors has important implications for asset allocators analyzing the performance of their portfolios and/or investment managers.
The Two Sigma Client Solutions Research team hosted a webinar on Tuesday, February 2nd to discuss its recent Street View, “How Design Choices Impact Low Risk Factor Performance.”
When it comes to the construction of risk factors, the team explains, seemingly innocuous specification details can have a surprisingly large impact on the factor’s performance.
During the COVID market crisis in 2020, for example, “Low Risk” factors and strategies (meaning those that buy or overweight low risk stocks and sell or underweight high risk stocks) exhibited meaningfully different performance depending on the design choices made by various providers.
The team examines five such design choices and measures their impact on the Low Risk factor’s performance.
They 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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