This research paper delves into the evolving narrative of factor investing, a concept that has significantly transformed from a niche strategy to a pivotal player in the investment arena.
Sparked by the 2008 financial crisis and further complicated by recent global challenges such as the pandemic, economic shifts, and geopolitical turmoil, factor investing has re-emerged as a critical area of focus. This study aims to demystify factor investing, situating it within the spectrum of traditional passive and active investment strategies.
We begin by addressing the fundamental questions: What constitutes factor investing? And how does it differentiate itself from conventional investment approaches? The paper then navigates through the various dimensions of factor investing, including its key components and their relative importance. A critical examination of the challenges in capturing factor premiums, the nuances of risk diversification, and the response of factors under diverse market conditions forms the core of this paper.
Supported by historical data and academic insights, this research seeks to provide a comprehensive understanding of factor investing, highlighting its potential advantages in a rapidly changing investment landscape. Additionally, this paper presents Timeline's strategic approach to incorporating risk factors within a multi-asset portfolio and evaluates the prevalence of these factors across different global regions. This exploration is aimed at offering valuable perspectives to investors and practitioners, enhancing their ability to navigate the complexities and opportunities presented by factor investing in today's dynamic world.