Using Factors to Manage Risk Without Neutralizing Bets

Alyx Flournoy, head of product specialists at Omega Point, explains how factor risk models can help short and long investors manage risks without neutralizing the desired idiosyncratic aspects of stock picking. Increasingly quantitative factors like interest rate sensitivity and short crowding are driving the movements of stocks, and in many cases to a greater degree than company fundamentals. That’s why it is more important than ever for investors to be “factor aware.” Flournoy breaks down the basics of what factors are, how they evolve and interact with each overtime, and the most important factors investors need to pay attention to right now. As well she gives examples of how factor risk models could be used to hedge out factor exposure and even preemptively identify risks of sharp price movements and short squeezes.