Shorting equity factors doesn’t add value, Robeco research finds

“When equity factors drop their shorts”

A common perception amongst academics and investors is that factor premiums, like Momentum, Value and Low-risk exists in equity markets and should be best harvest via both long and short positions. A team of three quant researchers and portfolio managers critically assessed the added value of shorts positions to harvest equity factors, and contrary to general market consensus, there’s none.

David Blitz, Pim van Vliet and Guido Baltussen made a breakdown of common equity factor strategies into their long and short legs, and found that (i) most added value tends to come from the long legs, (ii) the long legs of factors offer more diversification than the short legs, and (iii) the performance of the shorts is generally subsumed by the longs. In other words, equity factors may be more efficiently harvested by dropping their shorts.

The authors take many approaches to assessing the robustness of this finding, and they prove to be very robust. These results hold across large and small caps, are robust over time, carry over to international equity markets, and cannot be attributed to differences in tail risk. Moreover, it does not even account for the substantially higher implementation costs involved with the shorts compared to the longs. This research also challenge recent claims that the value and low-risk factors are subsumed by the new Fama-French factors, as the team found that this result is entirely driven by the short legs of these factors and breaks down for the longs. Altogether, the findings show that long legs of factor portfolio are crucial for understanding factor premiums and building efficient factor portfolios. ​

So the real question you should ask yourself is: why would you short stocks in your factor strategies, instead of why don’t you short equity factors.

The full document is attached.

20191210 GB When equity factors drop their shorts.pdf

PDF - 394 Kb


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About Robeco

About Robeco

Robeco is a pure-play international asset manager founded in 1929 with headquarters in Rotterdam, the Netherlands, and 17 offices worldwide. A global leader in sustainable investing since 1995, its unique integration of sustainable as well as fundamental and quantitative research enables the company to offer institutional and private investors an extensive selection of active investment strategies, for a broad range of asset classes. As at 31 December 2019, Robeco had EUR 173 billion in assets under management, of which EUR 149 billion is committed to ESG integration. Robeco is a subsidiary of ORIX Corporation Europe N.V. More information is available at