HOW INEFFICIENT IS THE 1/N STRATEGY FOR A FACTOR INVESTOR?

The last decade's dramatic democratization of factor investing has broadened its investor base to individual investors and their advisors. This paper studies the performance of classic allocation strategies-1/N, mean-variance, and minimum-variance-from these investors'perspective. Specifically, we curate commonly available long-only factor funds, adjust their premia for transaction costs, impose sensible concentration limits, and explicitly focus on active risk-and-return properties. Block bootstrap-based simulation shows that no alternative optimization strategy consistently dominates the simple 1/N strategy in active returns and information ratios. 1/N allocation appears a sensible strategic allocation for most factor investors without an edge in predicting factor premium.