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Whitepaper - April 2019

What, Exactly, Is a Factor? How Factor Portfolio Construction Impacts Exposures, Returns and Attribution

What, Exactly, Is a Factor? According to BlackRock, as of June 2018 there was $1.9 trillion invested in factor-based strategies – a figure expected to grow by nearly 80% to $3.4 trillion by 2022. There is no question that these strategies have moved to the forefront of investing, but their growing popularity begs the basic question: what do we mean by “factor”?

When we refer to factor returns, we mean the return to a long-short portfolio with unit exposure to the factor in question, and no exposure to any other model factor. The portfolio encompasses the model’s investment universe, is rebalanced daily, and has hundreds or thousands of small positions. While we consider these “Factor-Mimicking Portfolios” (FMPs) to be the purest expression of a factor’s return, we recognize that other practitioners may have different definitions – and that those different definitions can produce very different results.


Melissa R. Brown, CFA

Managing Director of Applied Research