Factor Premia: The Best Long-Term Investment Strategy?
(5 min read)
The holy grail of financial market investing is to find investment or trading rules that consistently make money over time. And while no one has found a rule that always avoids losses, some rules do better than others.
The simplest profitable strategy is to go long in asset market like equities or bonds. This type of return is known as beta. After this, the most widely known, profitable strategies relate to factors or factor premia. These are trading rules that have been shown to be profitable over long stretches of time and have developed academic support. Four common ones that can applied to several different markets are value, momentum, carry, and defensive.
But what are the benefits of each? And do any have serious pitfalls? Here, we take a look at an academic paper recently published by researchers from the quantitative hedge fund AQR to find some answers....
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