Factor Investing
Factor investing is suited for investors that want to manage risk, improve returns and achieve greater diversification.
Our philosophy
Multi-asset factor investing is the 3rd generation of portfolio construction after balanced portfolios and « core-satellite ».
A factor-based approach implies a better understanding of the drivers of a portfolio risks and returns and identifying the overlaps.
Our process
Multi-asset factor investing looks to identify and allocate to factors that may earn a positive return and increase diversification if added to a portfolio.
We have retained three style factors (value, carry and momentum) and four macro factors (growth, real rate, inflation and defensive). These factors are robust, weakly correlated and truly diversifying.
Portfolio allocation is carried out by risk factors rather than by asset class through a disciplined risk budgeting approach.
HSBC strengths
- At HSBC Asset Management, we entered the market in the early 2000s and propose factor investing alongside our more traditional investment strategies in equity, fixed income and Multi-Asset
- Strong research teams and proprietary portfolio construction tools support the investment team decision making
HSBC Multi-Asset Style Factors strategy
Our philosophy
In a context of low expected returns for most traditional asset classes where the bulk of future returns comes from “equity-like” exposures, building diversified strategic portfolios with attractive expected returns is challenging.
Style factors are weakly correlated with traditional asset classes and represent a new source of potential return and diversification for investors.
A strategy based on robust style factors that delivered persistent risk premia over the very long term is relevant for a strategic asset allocation.
Our process
The strategy uses a systematic approach which aims to capture 3 robust style premia (value, momentum and carry) across 3 asset classes (equity, bond and currency) through 9 customised style portfolios. Each style portfolio combines long and short positions, to capture the style premium in its "purest" form. The allocation of each style portfolio derives from the ranking of the investment universe on a defined metric: the style portfolio is long the better ranked assets, while being short the lower ranked.
The 9 style portfolios are then combined to maximise diversification across styles and asset classes, with no factor timing.
The strategy is implemented using highly liquid derivatives only. Only one portfolio is actually implemented, once all style portfolios positions have been netted.
HSBC strengths
- Our approach is focused and disciplined: we have selected 3 well-established and robust style factors (value, carry and momentum), each implemented across equity, bond and currency markets
- The investment process is systematic and transparent. The factor exposures are implemented in their purest form, taking long and short positions, with no structural exposure to any asset class
- The HSBC Multi-Asset Style Factors strategy is liquid and cost efficient. It is implemented at the aggregate level using highly liquid derivatives only
HSBC Multi-Strategy Target Return
Our philosophy
In a context of low expected returns and high valuations for most traditional asset classes, building strategic portfolios with attractive expected returns and diversification properties is challenging.
As asset diversification is no longer sufficient, investors should consider combining well-diversified directional exposures, based on macro factors, with exposures to other sources of return than those usually captured by traditional balanced strategies: the style factors.
Our process
The strategy is composed of 2 complementary allocations: a strategic factor allocation and a tactical factor allocation.
The strategic factor allocation exploits macro and style-based factors.
The macro-based factors allow the portfolio to be well-diversified and resilient across different macro environments; and the style-based factors allow the portfolio to capture non-traditional risk premia over the long run.
The tactical factor allocation seeks to actively tilt the strategic factor allocation by taking advantage of short-term opportunities.
HSBC strengths
HSBC Multi-Strategy Target Return is an innovative and diversified strategy that:
- gives investors access to a full range of persistent and weakly correlated factors (both directional and non-directional)
- is implemented across a broad investment universe of developed and emerging markets
- is robust and well diversified thanks to transparent and rigorous risk budgeting approach
Key risks when investing
- Risk of capital loss and management risk: It is important to remember that the value of investments and any income from them can go down as well as up and is not guaranteed.
- Interest rate risk: As interest rates rise debt securities will fall in value. The value of debt securities is inversely proportional to interest rate movements. Issuers of debt securities may fail to meet their regular interest and/or capital repayment obligations. All credit instruments therefore have potential for default.
- Equity risk: strategies that invest in securities listed on a stock exchange or market could be affected by general changes in the stock market. The value of investments can go down as well as up due to equity markets movements.
- Foreign exchange risk: Where overseas investments are held, the rate of exchange of the currency may cause the value to go down as well as up.
- Emerging market risk: Investments in emerging markets have by nature higher risk and are potentially more volatile than those made in developed countries. Markets are not always well regulated or efficient and investments can be affected by reduced liquidity.
- Credit risk: Issuers of debt securities may fail to meet their regular interest and/or capital repayment obligations. All credit instruments therefore have potential for default. Higher yielding securities are more likely to default.
- Counterparty risk: The strategy is exposed to Over the Counter (OTC) markets for all or part of its total assets. The portfolio will therefore be subject to the risk that its direct counterparty will not perform its obligations under the OTC transactions and that the strategy will sustain losses.
- High Yield: Please note that the fund is invested in High Yield issues, which represent a higher risk of default compared to Investment Grade issues.
- Financial derivative instruments: The value of derivative contracts is dependent upon the performance of an underlying asset. A small movement in the value of the underlying can cause a large movement in the value of the derivative. Unlike exchange traded derivatives, over-the-counter (OTC) derivatives have credit risk associated with the counterparty or institution facilitating the trade.
- Leverage: Leverage is the investment strategy of using borrowed money: specifically, the use of financial derivatives or borrowed capital to increase exposure to a financial market. Leverage can magnify profits, but it also increases the risk of loss.
- Arbitrage risk: Arbitrage risk is related to long/short strategies that involves buying long market that are expected to increase in value and selling short market that are expected to decrease. As the two markets is positively correlated (ie: beta equity for long/short equity strategy), the portfolio is exposed to the difference of underlying's performances. Arbitrage risk increases in case of performance decorrelation.
- Model risk: Model risk occurs when a financial model used in the portfolio management or valuation processes does not perform the tasks or capture the risks it was designed to. It is considered a subset of operational risk, as model risk mostly affects the portfolio that uses the model.
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