Factor Based Investing

Factor based investing is simply a matter of choosing stocks based on attributes associated with higher returns. In theory, factor investing enhances diversification, generates above market returns and manages risk. Factors tend to work well because they work at different times.

Two types of factors are Macro and Style. Macro factors are concerned with capturing broad risks across asset classes such as credit, inflation, currency and liquidity. Style factors explain the risk and returns within an asset class. Style factors include value, quality and momentum of a stock.