This paper analyzes the attractiveness of factor investing by comparing it directly to standard investing on a market index. In operational terms, we consider two types of factor investing portfolios based on long and short legs in the five Fama-French factors: the first one, called 130/30, is based on limits of \(130\%\) on long positions and \(-30\%\) on short positions; the second one, called LSMLOF, consists of having a long-short position on the market index and only long positions on the factors. Assuming the existence of a risk-free asset (i.e. the Treasury Bill), we examine two main portfolio allocation strategies, namely the buy-and-hold strategy and the constant mix one. To carry out the comparison of the performances of the different portfolios, we consider various criteria such as their first four moments and their Sharpe ratios. We also introduce the notion of compensating variation to better account for the entire distribution of returns and investors’ risk aversion. Our study confirms the benefits of factor investing.
