Asness versus Arnott: The Factor Timing Debate Continues

AQR Management founder Cliff Asness continues to argue that factor timing is “deceptively difficult,” contrary to what Rob Arnott of Research Affiliates would have you believe, says a recent article in Institutional Investor.

Asness’ issue, the article says, is with Arnott’s contention that risk premia factors such as value, momentum, growth and volatility have become “overvalued as a result of the rising popularity of smart beta and factor investing strategies” and that investors should “time their exposures to buy low and sell high.” Asness, on the other hand, argues that “diversification, not timing, is the best way to achieve returns through factor exposures.”

Arnott and colleagues recently published a series of white papers presenting “evidence in favor of a contrarian approach to factor timing,” the conclusions of which were tested by Asness and his team through trading simulations on a multi-factor portfolio both with and without factor-based timing strategies.

Results of the AQR study, reported Asness, support the notion that maintaining a diversified portfolio of “uncorrelated factors that you believe in for the long-term” is the better strategy, “instead of seeking to tactically time them.”