Does chasing factor performance work?
SUMMARY
INTRODUCTION
In August 2018, we explored whether chasing factors like value or quality in the stock market was a profitable investing strategy. After all, most investors only allocate to factors once returns have started to look attractive. Our analysis focused on 25 equity factors, where we constructed a long-short portfolio by selecting the top and bottom 5 factors based on their performance over the last 12 months. We explored this across markets, and while returns were positive from 2002 to 2018, performance was inconsistent. However, there is no reason investors should limit themselves to equity factors: trend-following funds, also known as CTAs, pursue the same strategy using futures across asset classes.