Bridge over ocean
16 July 2018 Financial Analysts Journal Volume 74, Issue 3

Constructing Long-Only Multifactor Strategies: Portfolio Blending vs. Signal Blending

  1. Khalid (Kal) Ghayur, CFA
  2. Ronan Heaney
  3. Stephen Platt, CFA

Long-only multifactor strategies may be constructed by combining individual-factor portfolios (portfolio blending) or by combining individual-factor signals into a composite signal to construct the portfolio (signal blending). To compare these two approaches, we present a framework for building exposure-matched portfolios. In empirical tests on global equity markets, we find that, generally, portfolio blending generates higher information ratios for low-to-moderate levels of tracking error. At high levels of tracking error, signal blending delivers better risk-adjusted performance. These results generally hold for various factor combinations, and they have important practical implications for investors considering the implementation of multifactor smart-beta strategies.

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