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.
Factor Investing Has Changed
Instinet
Joseph Mezrich
Research
17 Pages
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.