This paper evaluates the behavior of a wide range of factors and proposes a methodology to determine the degree to which a factor’s returns are the result of sector exposures. Evidence shows the majority of factor performance can be explained by the sector weights.
This has significant ramifications to hedge fund managers employing long/short strategies as well as long portfolio managers. Both types of managers are in a better position to deploy factor-based strategies if they understand the role sector plays in performance and risk.