Vol.21, No.1, 2023
by Kevin Khang, Antonio Picca, Shaojun Zhang and Minzhi Zhu
The last decade’s dramatic democratization of factor investing has broadened its investor base to individual investors and their advisors. This paper studies the performance of classic allocation strategies—1/N, mean–variance, and minimum-variance—from these investors’perspective. Specifically, we curate commonly available long-only factor funds, adjust their premia fortransaction costs, impose sensible concentration limits, and explicitly focus on active risk-and-return properties. Block bootstrap-based simulation shows that no alternative optimization strategy consistently dominates the simple 1/N strategy in active returns and information ratios. 1/N allocation appears a sensible strategic allocation for most factor investors without an edge in predicting factor premium.