Stepping Up to Factor Investing

Abstract

The terms ``smart beta'' and ``factor'' are now common and have frequently been in the spotlight of the financial press in the past few years. Factor investing targets factors that the investor believes will be rewarded over the long-term. At the same time, an investment decision based on this conviction can outweigh sales statements such as guaranteed superior performance of factors. This chapter discusses (1) the evolution of factor investing, (2) its advantages and disadvantages and (3) the main factors that are widely accepted among academics and professionals. Most investors appreciate the transparency, scalability, ease of implementation and the track record of rules-based factor strategies. This has contributed to an increasing adaptation of factor strategies and risk premia strategies among retail and institutional investors.