Multi-class, Multi-factor Investing

What is the best way to tackle multi-class, multi-factor investing? In their August 2017 paper entitled “Investing in a Multi-Asset Multi-Factor World”, Alexandar Cherkezov, Harald Lohre, Sergey Protchenko and Jay Raol investigate the use of factor investing across multiple asset classes. They define several factors for each of four asset classes, as follows:

1. Equities (individual stocks for developed and emerging markets) – value, momentum, quality and low volatility.
2. Currencies (forwards for developed and emerging markets) – carry, value, momentum and quality.
3. Commodities (24 futures series) – carry, term (duration) and momentum.
4. Interest rates (10-year swaps for developed and emerging markets) – carry, value, momentum and quality.

To integrate the portfolio with high diversification, they employ diversified risk parity by each month: (1) identifying uncorrelated clusters of risk across asset classes and factors based on a rolling 60-month or expanding (inception-to-date) lookback window; and, (2) setting long-only allocations such that each uncorrelated risk cluster contributes equally to overall portfolio risk. For comparison, they also consider equal weight, minimum variance and equal risk contribution (equal contribution to portfolio risk by each individual factor) allocation approaches. Using data needed to form factor portfolios and measure factor returns in U.S. dollars across asset classes from the end of January 2001 through the end of December 2016, they find that:

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