Factor Investing Has Changed

Instinet

Research

17 Pages

Instinet examines how factor investing has evolved as crowding, structural shifts, and changing market dynamics weaken traditional premia and challenge static implementations. The paper argues that once-reliable factors are becoming less persistent, with evidence suggesting performance decay and rising correlations across factors, pushing investors toward more adaptive and timing-aware approaches.

Key Takeaways

Factor Premia Compression: Several core equity factors saw excess returns decline meaningfully post-2010, with some premia falling by over 50% versus historical averages.
Rising Factor Correlations: Cross-factor correlations increased to roughly 0.6 in recent periods, reducing diversification benefits compared to prior decades closer to 0.2–0.3.
Crowding Impact Evidence: The most crowded factor cohorts underperformed by nearly 3–5% annually during unwinds, highlighting implementation risks tied to flows and positioning.

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