On the one hand, several institutional investors across the world (e.g., Pension Funds) face massive shifts from defined-benefit pension to defined-contribution pension schemes. This implies that individuals are becoming increasingly responsible for making investment decisions related to their retirement financing needs, investment decisions for which they have no expertise. On the other hand, Sovereign Wealth Funds, Family Offices, Corporations, Endowments and Foundations seek personalized and tailor-made solutions to achieve their return targets. In terms of costs and management fees, it is of crucial importance to differentiate how much of a manager’s performance is alpha and how much is factor exposure, since one should never overpay for something that one can get more cheaply.
In the age of driverless cars, remotely piloted aerial vehicles, and smartphones, technology being utilized in the financial industry seems almost prehistoric, even though financial markets are constantly evolving. In this highly challenging environment, it is becoming increasingly recognized that institutional and individual investors alike are facing problems for which they need customized investment solutions. Contributing to solving these complex investment problems in order to fulfill financial goals has become the key challenge that the investment industry has to face.
This realization is leading to a new investment paradigm, with substantial welfare improvements expected for both institutional and individual investors. This new paradigm is called factor-based investing which subsumes the popular marketing names such as smart, strategic, scientific, exotic or alternative beta products as all of them at heart represent factor strategies no matter if they are considered as an anomaly, puzzle or risk premium.