Factor Exposure
Factor exposure describes how returns are driven by underlying systematic risks such as value, momentum, quality, duration, or credit spreads.
Definition
Factor exposure refers to the sensitivity of a strategy’s returns to common drivers that affect many assets. These factors may be equity style factors (value, growth, momentum), macro factors (rates, inflation), or credit factors (spread duration, default cycle). Understanding factor exposure helps allocators distinguish diversified strategies from strategies that share the same hidden risks. Allocator Context Allocators use factor exposure to avoid accidental concentration. Two managers can appear different by name and holdings yet behave similarly because they are exposed to the same factors. Factor analysis is also used to validate whether a manager’s stated edge is real or simply a repackaged factor bet. Decision Authority Factor exposure discussions often appear in committee memos for public strategies and hedge funds. If factor exposures create redundancy or increase correlation to existing sleeves, allocations may be reduced even if track record is strong. Why It Matters for Fundraising Managers gain credibility when they can explain factor exposure plainly and demonstrate that they understand what drives outcomes. Claiming “uncorrelated returns” while being factor-exposed is a common diligence failure. Key Takeaways Explains hidden drivers of returns Prevents accidental portfolio concentration Helps separate skill from factor bets Supports more accurate portfolio-role framing