Fundamental Managers, What Is the Factor Zoo?

3min Snip

00:00

Play full episode

Summary

Transcript

Episode notes

The factor zoo is either just like a handful of definitions or it's hundreds of these different characteristics. It can be filtered heavily to the areas that you care about, such as industry-specific factors. You have a baseline model like Barra Axioma, could be considered to be more alpha or more identifiable with your type of strategy. The money flows follow the momentum factor for Axiomo.

After March 2020, a growing research interest of mine was the question, “how do strategies reflexively impact the markets they trade?” Beyond crowding risk, can adoption of strategies fundamentally change market dynamics.

In Season 3 Episode 11, I spoke with Omer Cedar, who argues that equity quants have done precisely that. The mass adoption of factor models, whether for alpha or risk, fundamentally changed how baskets of stocks are bought and sold. For a discretionary manager to ignore this sea change is to ignore a fundamental shift in the current of the water they swim in.

In this clip from the episode, Omer discusses how quants have changed the market and how fundamental managers should use this information to sharpen their edge.