How Should You ACTUALLY Trade Factors?

Introduction

Let’s say you have done some research and found a few factors to be statistically significant and now would like to get some sweet, sweet exposure. OR, you’ve read my recent article on factor timing and want to get your hands on some factor timing exposure. This article talks about how you can properly, practically do some sweet factor trading.

Most factor investors treat their exposures like furniture - they choose them, place them, and leave them alone. Value gets 20% of the risk budget, momentum gets 15%, quality gets 10%, and that’s that. Rebalance quarterly, maybe annually, move on.

Let’s assume for an example that you’ve FOUND that factors trend. You realize that the same factor that worked last month tends to keep working this month.

The question is how to trade factors properly when you find something that works AND you want proper exposure to it. Before you can time factors, you need to solve the problem of what you are actually trading (because you cannot actually TRADE factors), a fact that most academics skip over!