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For instance, consider momentum strategies. Naive portfolio construction will likely load on large style/industry return components, which increases portfolio risk dramatically.

How do quant funds usually construct hedged factor portfolios that try to neutralize such unwanted large risks?

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    $\begingroup$ BlackRock Inc.’s iShares MSCI USA Momentum Factor ETF (ticker MTUM)](bloomberg.com/news/articles/2021-05-24/…) is not a quant fund but a pretty successful ETF which employs a quant momentum strategy does not seem to worry too much about this. They supposedly will push the weighting of financial stocks to a third from less than 2% currently, while he technology sector will slide to 17% from 40% within a few days. $\endgroup$
    – AKdemy
    Jun 17, 2021 at 19:55
  • $\begingroup$ @AKdemy Thank you. I'm sure there are counter examples. However, I also do believe that some funds do care about not taking industry/style bets, so my question is targeted at those funds. $\endgroup$ Jun 26, 2021 at 2:26

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You are absolutely right about momentum strategies having loadings on industry. But that's also where the risk premium originates from - see this paper by Moskowitz and Grinblatt.

In a broader sense, most factors have loadings on other factors (e.g. Quality often has loadings on Size) and that's why they are called factor "tilts" instead of "pure" factors. You can theoretically hedge everything (e.g. buying puts of S&P to make your portfolio market-neutral) until the only thing left is your desired factor, but from my past experience, the resulting alpha will probably be small if statistically significant at all.

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