February 04, 2020

Target Exposure: Investment applications and solutions

Factor strategies differ significantly in terms of portfolio construction. There is much debate regarding the pros and cons of alternative construction approaches. A vigorous debate has unfurled over the best way to combine factors into a single portfolio, with some practitioners preferring the top-down approach and others favoring a bottom-up "integrated" approach.

In this paper, we:

  • Explain how the tilt methodology maybe extended to incorporate explicit exposure targets
  • Outline use cases and applications of the target exposure methodology that encompass multi-factor portfolio construction, sustainable investment objectives, and reductions in implementation risk
  • Contemplate how the target exposure framework may be deployed to implement alternative factor allocation regimes and discuss the role of pure factor portfolios, from their creation to use as an investment solution
  • Consider absolute return products, then illustrate the role that pure factor portfolios play in constructing genuine Top-down, multi-factor solutions