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Financial Wisdom Part Deux – Factor Investing

Here is question two from the Abnormal Returns blogger wisdom series:

Question: Assume you have discovered an equity return factor that is both previously unknown and uncorrelated with other factors. What would you do to monetize that insight? (Answers in no particular order.)

My answer:

Well, I’ve been pretty negative about factor investing so it would be pretty damn hypocritical of me to start a factor fund. I am deeply skeptical of the idea that anyone can capture consistent alpha in any factor. And even if factors exist there is solid evidence showing that they tend to disappear once discovered or lapse for such long periods that it can make it impossible to capture the gains in a realistic time horizon. I know I am going against the tide here, but my view is that most factor strategies are the hope of market beating returns in exchange for the guarantee of higher fees. That’s not a bet that tends to work out for most investors. Not to mention the fact that “alpha” is not a financial goal. It’s just something we all want and don’t need.

I know factor investing is the hot thing right now, but I view it more as the new active and not necessarily something that can be captured as easily as the academic research leads us all to believe….