The second source is the AUM of the main managers offering mutual funds in Europe only, it can be seen that assets have grown from under $3.0bn in 2015 to around $15bn today.
Clearly, this second source is a sub-set of the first but the common feature of these data points is the rapid rate of growth, which is very consistent. Therefore, this technique can be argued to be mainstream in many portfolios.
Which type of investors use this approach?
As the approach has its roots in academic literature, the first practitioners were very large pension funds, who were mainly advised by consultants.
Over time, this has spread to small/mid-size pension plans (who use the same consultants), sophisticated private banks, as well as wholesale investors, such as wealth managers and fund of fund managers.
While this spread of investors may seem surprising, factor based long/short investing has been helped by three trends.
Firstly, other ‘absolute return strategies’ which proved so popular in the aftermath of 2008 crisis (for example, DGFs in the UK pension funds, which rapidly spread to wealth managers in the UK and widely across Europe).
While the investment approach of most of these strategies is not based on style factors, the idea of using ‘non-traditional long/short or long and long/short styles’ has opened the door to new investment approaches, such as Style Factors.
The second trend behind this rising popularity is the penetration of consultants into the wealth management channels (they provide asset allocation, as well as manager selection services).
This has been particularly noticeable over the last five years, as consultants have diversified their business model away from their traditional institutional client base.
The final trend is the rich valuations of most traditional asset classes, especially fixed income assets, which has pushed investors to look for sources of return other than their usual strategic investments.
Although this is especially true for many government bond markets, this characteristic has been argued for high quality credit investments as well.
In such an environment, style factors have been identified as one efficient way to reconcile long-term returns and diversification and have been attracting increased interest from many different asset owners
How do clients use it in portfolios?
Thanks to their long/short approach and provided the style factors are carefully selected and combined, multi-style, multi-asset portfolios are market neutral, on average.
This is proved by the long-term numbers showing negligible correlation to the core beta markets in bonds, equities and currencies.
As a result, clients use it as a diversifier to the conventional investments and mainly put it the alternatives buckets.
