Title: Factor investing: The missing link between active and passive management
Authors: Wale Dare - HEC Liege (Belgium) [presenting]
Marie Lambert - HEC Liege (Belgium)
Serge Darolles - Paris Dauphine (France)
Guillaume Monarcha - Orion Financial Partners (France)
Abstract: The number of equity indices is more than 70 times greater than all the listed stocks in the world. A subset of these indices, alternative risk premia (ARP), attempt to capture market anomalies, i.e. sources of return not priced by traditional factors. These investment strategies are first back-tested before being commercialized at inception date. An event study on the significance of these alternative risk premia is carried out to explain active management returns pre- and post-inception date. The empirical results show that alternative risk premia significantly explain active management returns pre-inception but that their relevance significantly decreases after inception. The decrease in significance is directly related to the number of indices replicating the same strategy available on the market. The implications of these results are twofold. First, the results support the existence of an economic cycle of alternative risk premia which starts as an active investment strategy to a passive investment package into indices. Secondly, we give evidence of a crowd effect leading to a change in the business model of asset managers from active-based returns to fee-based revenue.