Don’t Try to Time Factors, Says Cliff Asness

Investors should resist the temptation to attempt factor timing, AQR Founder Cliff Asness has argued.

In a new paper, “The Siren Song of Factor Timing,” Asness said that timing a factor—owning more of it when its expected returns are high, and less when expected returns are low—is akin to timing the stock market: it “should be done in very small doses, if at all.”

“Factor timing is very tempting and, unfortunately, very difficult to do well,” he continued.

“If you time the factors, and
I don’t rule it out completely, make sure you only ‘sin a little.’”Moreover, the most extreme form of factor timing—declaring a previously useful factor no longer effective due to crowding—would require much stronger evidence than exists currently, Asness said.

“An ‘arbitraging away’ would lead to a factor looking much more expensive than any time in history,” he wrote. “To date, the evidence that this has already occurred is weak and mixed.”

According to Asness, current value spreads on the most well-known factors are within normal historical ranges—either somewhat cheap or somewhat expensive compared to previous values.

“It seems highly unlikely this is the telltale sign of extreme factor crowding,” he wrote. “Barring such an extreme, I… find timing based on these spreads to add little to a portfolio in terms of return or diversification.”

Though Asness predicted factors will be arbitraged away at some point in the future, he added that it will be a “pleasant path getting there.”

As for the possibility of a crash in one or more factors, Asness said that sell-offs can and will occur in factors just as they do in the stock market. However, he argued that long-term investors should focus not on trying to time crashes but on being able to survive them.

“Invest in [factors] if you believe in them for the long term and be prepared to survive, not miraculously time, these events sticking with your long-term plan,” he concluded. “If you time the factors, and I don’t rule it out completely, make sure you only ‘sin a little.’”