Factor allocation decisions are becoming a prominent consideration for factor investors. Which factors to allocate to, and in what magnitude, has a significant impact on investment outcomes and should be a key focus of investors. As multi-factor investing grows in popularity, we hope it will evolve from the mere identification of a set of factors to cover the explicit choice of the relative magnitude of each factor’s exposure.

In this paper, we seek to aide this evolution as we present:

  • three factor allocation schemes, which can deliver balanced exposure to multiple factors
  • meaningful insights into the volatility and correlation of factor risk premia and how this can inform factor allocation decisions
  • a transparent, non-optimized, bottom-up portfolio construction mechanism that can deliver bottom up factor allocation