One of the more interesting combinations of factor exposures is value and momentum. Value and momentum have both delivered strong excess returns, and blending them together also has strong benefits, even though the value and momentum strategies are negatively correlated.
An interesting new paper looks at the combination by trying to explain the excess returns through a pricing kernel that uses nine latent variables from the combined value and momentum cross-section, see "Value and Momentum Leftovers". The combination has proven to be much better than investing in each factor by itself. However, there is an issue of what the pricing kernel should be to help combine these two factors because there is a significant alpha after trying to price the combination. Additionally, the idea that you can just blend the value and momentum as a 50/50 combination may not be effective.
We will not go into the details of this "leftover" argument other than to say that the use of latent variables can help price these two key factors and can lead to better factor combination outcomes. The blend of value and momentum can be improved through well-defined pricing techniques.
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