An Empirical Case Study of Factor Alignment Problems Using the USER Model

The practical issues that arise due to the interaction between three principal players in any quantitative strategy—namely, the alpha model, the risk model, and the constraints—are collectively referred to as factor alignment problems (FAPs). Examples of FAPs include risk-underestimation of optimized portfolios, undesirable exposure to factors with hidden and unaccounted systematic risk, consistent failure in achieving ex ante performance...