"A Century of Macro Factor Investing - Diversified Multi-Asset Multi-Factor Strategies through the Cycles" explains how a portfolio of diversified factor strategies can be created to protect or exploit specific macro risk exposures through computing macro factor mimicking portfolios (MFMP). Using a wide a set of factors, the researchers create growth, inflation, defensive, and parity portfolios and then compare against different market environments. They find that these portfolios can effectively generate return during positive environments; however, there is the ongoing problem of predicting when these environments will occur. These MFMP portfolios will do better than portfolios just associated with macro factor exposures.
The data show that defensive portfolios will do a good job across all environments and are well diversified. The authors go on to show that creating portfolios that include forecasts on the macro environment and factor momentum will do better than static portfolios. Active management in a Black-Litterman framework can effectively add value to a portfolio of alternative risk premium.
Based on a century of data, ARP portfolios focused on macro exposures can add value over the long-term.
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