- Andrew Ang, Columbia finance professor
The change in focus by money managers from asset to factor-based investment management is the future of finance. Thinking through how any factor effects asset is still the number one issue for all asset managers. The driver of returns is fundamental to understanding return behavior. These are simple questions that still need good answers. If there is an increase in economic growth, how will it effect a given stock? If there is higher inflation, how will that impact the bond markets? What is the relationship between the business cycle and any asset market? What is the impact of oil price shocks on energy companies? You cannot be a good money manager without having a view on these issues, so focusing on the factors seems natural. The same applies to investors. It is not what assets you hold but what factors you want to protect against. Is it inflation? A downturn on the economy? Regional growth? Understanding these is vital to meeting long-term portfolio needs.
Unfortunately, the link between factors and assets is not well-defined, changes over time, and can have a slow adjustment. We work with assets because prices are primal and drive returns. I don't know for sure the reason for an increase in price but I do know that if I am long and the price goes up my returns are positive. If I don't hold an asset that goes up faster than other assets I hold for the same risk, I have made a bad decision. Factors serve as the core for performance attribution to portfolio returns. If you can make the right attribution forecasts, you will outperform other managers, but you have to understand the links between factors and assets. Knowing that they exist and the general attributes is not enough.
The future for managed futures and systematic trading is to embrace the factor revolution and use the behavior and link between factors and prices as an added tool for the improving performance. Success of the next five years will be for any manager who can make an effective leap to factor-based management.
Unfortunately, the link between factors and assets is not well-defined, changes over time, and can have a slow adjustment. We work with assets because prices are primal and drive returns. I don't know for sure the reason for an increase in price but I do know that if I am long and the price goes up my returns are positive. If I don't hold an asset that goes up faster than other assets I hold for the same risk, I have made a bad decision. Factors serve as the core for performance attribution to portfolio returns. If you can make the right attribution forecasts, you will outperform other managers, but you have to understand the links between factors and assets. Knowing that they exist and the general attributes is not enough.
The future for managed futures and systematic trading is to embrace the factor revolution and use the behavior and link between factors and prices as an added tool for the improving performance. Success of the next five years will be for any manager who can make an effective leap to factor-based management.
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