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Adaptive Multi-Factor Allocation

categories: Indexes, Factor and Risk Modeling, Investing (Investment Management), Portfolio Construction and Optimization, Asset Owners, Equities, Asset Managers (Quant or Fundamental), VARSANI Hitendra, JAIN Vipul, general

Although factor allocation approaches based on simple diversification techniques such as equal-weight or risk parity are transparent and have performed well historically, some investors, such as valuation-sensitive or macro-sensitive investors, utilize a dynamic approach by adapting factor allocations to be more consistent with their strategic or tactical asset allocation process. An adaptive approach aims to strike a balance between a pure single factor timing strategy and the diversification effects of a multi-factor allocation strategy. We discuss a framework that aims to adapt multi-factor allocations to changing market environments while seeking to preserve some of the diversification benefits of multi-factor investing.

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