Hedge Fund Replication May Not Be The Optimum Use Of Factor Investing Strategies

Hedge Fund Replication May Not Be The Optimum Use Of Factor Investing Strategies

Factor Investing And Risk Allocation: From Traditional To Alternative Risk Premia Harvesting

Introduction

Academic research (see Ang (2014) for a synthetic overview) has highlighted that risk and allocation decisions could be best expressed in terms of rewarded risk factors, as opposed to standard asset class decompositions, which can be somewhat arbitrary. For example, convertible bond returns are subject to equity risk, volatility risk, interest rate risk and credit risk. As a consequence, analyzing the optimal allocation to such hybrid securities as part of a broad bond portfolio is not likely to lead to particularly useful insights . . .

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