Investment professionals have long relied on factor investing—strategies built around characteristics like value, momentum, and quality—to generate returns beyond the broad market. But predicting which factors will perform well in the future has remained challenging. Liyao Wang and Ming Zeng, authors of the December 2025 study “Factor MAX and Predictable Factor Returns,” introduced an intriguing p...
The study suggests that investors systematically underreact to extreme returns at the factor level, creating an opportunity for exploitation. However, it's important to note that the practical implementation of this strategy requires consideration of transaction costs, factor universe selection, and combination strategies with existing strategies such as factor momentum. Additionally, the study provides insights into market psychology and the limits of investor attention in processing complex, p...