10 in-depth interviews revealed thoughts about where Factor Investing could be heading in the future

10 in-depth interviews revealed thoughts about where Factor Investing could be heading in the future

Future of factors: using factors to help drive performance and manage volatility

  • Recent market turmoil has highlighted advantages in developing and using sophisticated factor techniques to predict, manage, and take advantage of market volatility
  • Factors are being used in scenario analysis to predict how portfolios may react to macroeconomic events and manage tail-risk
  • Investors are using factor allocations alongside strategic asset allocations to manage and optimize volatility across the entire portfolio

While we cannot predict geopolitical events, we want to understand what the factor sensitivity is to those events and use that to predict how the portfolio is going to perform. Factors are becoming more important because we want more granularity and better tools to understand how different factors react in different scenarios.

Retail investor, North America

Factor investing meets commodities

  • Investors find merit in commodity strategies as a hedge against unexpected inflation; there is growing belief factors can aid implementation
  • A factor approach is seen as offering additional sources of return and, for some, a way of overcoming the ESG challenges of investing in commodities
  • Alternative data sets such as shipping rates are being use within commodity factor models alongside conventional metrics such as price momentum

Machine learning uncovering non-linear factor relationships

  • Developments in cloud computing and big data have enabled more participants to access AI and machine learning tools
  • Investors are developing non-linear models of the interaction between factors and developing multi-factor models to take advantage of these relationships
  • Natural Language Processing (NLP)-strategies are being used to fine tune trading models by predicting short-term price movements

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

  • Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.