In an Op-Ed for Pensions & Investments, Two Sigma’s Alex Botte, CFA, CAIA, explains why factor analysis can be an effective tool in a quantitative research kit when performing due diligence on prospective managers.

Alex writes, “When evaluating an active manager, it's easy to look at past returns on both an absolute basis and relative to benchmarks and peers. But the results of those analyses won't explain how the manager achieved those returns. It is through factor analysis that investors will find answers to a series of critical questions and determine whether managers are meeting expectations and delivering what they claim.”


“More importantly, factor analysis empowers the investor to ask questions that otherwise wouldn't have been asked and to identify gaps between what's shared in a marketing deck and risk exposures that are evident in past returns. Such insights can greatly enhance an investor's overall picture of a prospective manager when paired with the qualitative side of their assessment process.”

To read Alex’s full commentary in P&I, click here.

 

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