Analysis: The evolution of risk factor investing

Risk factor investing is growing in popularity but Thierry Roncalli, head of research at Lyxor Asset Management, asks whether it should be used as part of a strategic allocation, or in order to take more tactical investment positions.

Risk factor investing is best defined as the attempt to capture a specific risk premium in a systematic way. While the strategy has grown in popularity in recent years and has become an important concept within investment portfolios, it is not a new idea - traditional finance theories such as the capital asset pricing models (CAPM), devised by Treynor, Sharpe and others, date back to the 1960s. This historic approach, measured by beta, compensates investors for holding equities rather than less risky assets, by allowing them to capture equity market risk premium simply by holding the ...