Leveling up factor performance: a multidimensional approach

Key takeaways
Compensated & uncompensated factor risks
Dedicated factor investors would be unwise to disregard the uncompensated risks that come along with standard factor investing approaches.
Diversified signals improve performance
Our examples show that a multidimensional approach is better than relying solely on a common signal with high conviction.
Enhanced factor portfolio benefits
The enhanced factor portfolio comes with higher returns, significantly lower risk, significantly higher IR and significantly smaller drawdowns.
Factor investing has revolutionised the way investors construct their portfolios – through a simple, transparent, rules-based approach that relies on factors to manage key drivers of risks and returns. But naive implementation of factor strategies may prevent investors from unleashing a factor’s full potential.
We show how investors can potentially improve factor premiums by diversifying across signals and removing exposures to unrewarded risks.