Abstract

A new approach known as factor investing has recently emerged in investment practice, which recommends that allocation decisions be expressed in terms of risk factors, as opposed to standard asset class decompositions. While the relevance of factor investing is now widely accepted amongst sophisticated institutional investors, an ambiguity remains with respect to the exact role that risk factors are expected to play in an asset-liability management investment process.

The main objective of this paper is precisely to contribute to the acceptance of factor investing by providing useful pedagogical clarification with respect to the benefits of factor investing within the liability-driven investing paradigm.

To this end, we draw an important distinction between the benefits of factor investing in the performance-seeking portfolio and its benefits in the liability-hedging portfolio.

We also argue that adopting a factor investing lens offers new useful insights with respect to the improvement of the interaction between performance-seeking and liability-hedging portfolios. Overall, our paper can be regarded as a first step towards the introduction of a comprehensive investment framework blending liability-driven and factor investing, widely recognized as the two most significant advances in institutional money management over the last two decades.

Scientific Portfolio AI- Generated Summary

This paper provides an in-depth analysis of factor investing in liability-driven and goal-based investment solutions. The publication aims to help investors improve their investment performance and risk management through factor investing.

The paper begins with an introduction to factor investing and how it differs from traditional investment approaches. It explains that factor investing involves identifying and targeting specific factors that drive asset returns, such as value, momentum, and quality. The authors argue that factor investing can provide investors with a more efficient and effective way to achieve their investment goals.

The paper then explores how factor investing can be applied to liability-driven investment solutions. It explains that liability-driven investing involves matching the duration and cash flows of a portfolio to the liabilities of the investor. The authors argue that factor investing can help investors achieve their liability-driven investment objectives by providing a more efficient way to manage risk and generate returns.

The paper also provides practical strategies for improving the interaction between performance-seeking and liability-hedging portfolios with factor investing. It explains that investors can use factor investing to manage the risk of their performance-seeking portfolios by targeting factors that are negatively correlated with their liability-hedging portfolios. The authors also suggest that investors can use factor investing to generate returns in their liability-hedging portfolios by targeting factors that are positively correlated with their performance-seeking portfolios.

In conclusion, the paper argues that factor investing can provide investors with a more efficient and effective way to achieve their investment goals. It explains that factor investing can be applied to liability-driven investment solutions to help investors achieve their investment objectives. The authors provide practical strategies for improving the interaction between performance-seeking and liability-hedging portfolios with factor investing. Overall, this publication provides valuable insights for investors looking to improve their investment performance and risk management through factor investing.