I have several questions regarding Fama-French and other (for instance, BAB) equity return factors for practical purposes (portfolio construction, portfolio risk analysis, portfolio return analysis). I am interested in answer for any of the questions below. I am familiar with "factor zoo", so below when I write "factors" I mean Fama-French 5 factors + Momentum + BAB + FMAX + tail risk + liquidity risk (Pastor or Sadka approach).
Portfolio construction stage.
1.1 Do practioners really use factors to construct portfolios (for instance, a combination of factor ETFs or manual construction of portfolio based on factor selection)?
1.2 If so, is there any literature covering prediction of factor (SMB, HML, ...) returns? As data on Kennet French site demonstrates, some factors (SMB, HML for example) have demonstrated really weak performance over past decade... In fact, I have basic idea, that HML upside is driven by low interest rates, but it's too obvious and superficial...
2.1 Besides the standard risk-management procedures, can factors be used to understand what are main risk factors underlying specific equity portfolio?
2.2 If so, how can we use this knowledge to hedge such risks? We are interested mostly in tail risk, aren't we? So we shall model someway the relationship between risk factors in tail situation (copula/ something else?) and build some stress scenario under this model?
2.3 Say we identified portfolio exposure to some factor risks. Which instruments might be used to hedge? Long put options on market index/factor ETF or something else?
Portfolio return analysis.
3.1 Academic papers really enjoy criticizing hedge funds for zero alpha after regressing hedge fund returns on some return factors. But isn't the devil in good factor selection for portfolio exposure? I mean, may be there is no need to generate some alpha for portfolio managers, since investor mostly benefits not from alpha, but from correct factor selection in portfolio, and as for me, it's really not so easy to predict which factors will perform well in the future and how much they will reward. And regressing past fund returns gives us static averaged over time view on historical fund strategy and factor selection only, thus benefits from such a knowledge seem to be limited...