Skip to content
    1. Overview
    2. Alternative Managers
    3. Consultants
    4. Corporations
    5. Family Offices
    6. Financial Advisors
    7. Financial Institutions
    8. Individuals & Families
    9. Insurance Companies
    10. Investment Managers
    11. Nonprofits
    12. Pension Funds
    13. Sovereign Entities
  1. Contact Us
  2. Search
  3. Client Login
Point of View · 01.02.22

Going All In with Factors

We analyze three ways to implement factor‑based strategies.

  • Portfolio Construction
  • Equity Insights
  • Factor Investing
Michael Hunstad, Ph.D.
Deputy CIO & CIO of Global Equities

Key points

What this is

We analyze three ways to implement factor-based strategies: equal-weighted factors, equal-weighted active risk, and equal-weighted absolute risk.

Why it matters

Each choice affects expected outcomes, transactions costs, ease of implementation and the portfolio’s ability to track a benchmark.

Where it's going

Investors can align factor implementation to fit their investment objectives.

Even in traditional portfolios, research we have seen shows that most of the variation of returns come from  allocations and not manager or vehicle selection. So choosing the right factors targeted to your specific goals is very important. With this in mind, there are three ways to approach this: equal- weighted factors, equal-weighted active risk and equal-weighted absolute risk.


Equal-weighted factors is the most simplistic approach to factor investing and it happens to be very popular and off-the-shelf factor products, often called smart beta. Equal weighting simply involves making equal allocations to factors. Clearly some advantages to this approach: it's easy, it’s transparent and it can utilize a variety of managers in the process. However, because factors have different volatilities, one major disadvantage is that actual portfolio risk can be skewed to just one or two factors, which represents a major risk to the overall portfolio.


The second design is the equal-weighted active risk approach, meaning that each factor contributes equally to portfolio . On the surface this seems to be very logical and consistent with standard approaches on risk parity. It also works well for investors that do not have a view on the attractiveness the various factors and instead want to equally spread their factor risk across the portfolio. However, individual factor active risks can be highly unstable and a portfolio can experience rapidly changing allocations to risk factors over time, which as a result causes higher turnover and fees.


Finally, we look at the equal-weighted absolute-risk approach, which involves weighting factors so that they equally contribute to the total risk of the portfolio. The key benefit of this approach is that absolute risk is much more stable than active risk for tracking error. One downside is that the factor contribution to active risk varies over time, which may make it harder to track given benchmarks. But the result is a more stable portfolio, fewer transactions and lower overall fees than the active-risk approach.

Main Point

Aligning Factor Portfolios with Your Goals

Going all-in with factors means understanding the trade-offs of the different factor-implementation approaches and how they support your investment objectives. These trade-offs affect portfolio management costs, how much each factor influences portfolio results, simplicity, transparency, and how well the portfolio returns track a benchmark.

Portfolio Construction

  • Read Now
Placeholder background

Michael Hunstad, Ph.D.

Deputy Chief Investment Officer & Chief Investment Officer of Global Equities

Michael Hunstad is deputy chief investment officer and chief investment officer of global equities for Northern Trust Asset Management. Michael is a member of the Asset Management Executive Group and has oversight of all equity portfolio management, research and trading activities including quantitative, index and tax-advantaged strategies. Additionally, he assists with the development of investment vision, strategy portfolio construction and risk management framework for the firm’s broad investment platform.

Read Bio

Contact Us

Interested in learning more about our expertise and how we can help? 


For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. The information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc (NTI) or its affiliates. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTI or its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.


This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.


All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTI or its affiliates’ efforts to monitor and manage risk but does not imply low risk.


Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTI or its affiliates. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult an NTI representative.


Forward-looking statements and assumptions are NTI or its affiliates’ current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve.  Actual results could differ materially from the results indicated by this information.


Hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of NTI or its affiliates.


This information is intended for purposes of NTI and/or its affiliates marketing as providers of the products and services described herein and not to provide any fiduciary investment advice within the meaning of Section 3(21) of the Employee Retirement Income Security Act of 1974, as amended (ERISA). NTI and/or its affiliates are not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials, which are for marketing purposes and are not intended to serve as a primary basis for investment decisions. NTI and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing, and other services rendered to various proprietary and third-party investment products and firms that may be the subject of or become associated with the services described herein.


Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.


Not FDIC insured | May lose value | No bank guarantee