When it rains, it pours: Multifactor asset management in good and bad times

We examine the profitability of multifactor portfolios on the US stock market. Using passive sector investing as the benchmark, we assess the performances of factor‐based asset management strategies in good and bad times. When short selling is unrestricted, factor investing outperforms sector investing in all respects. For long‐only portfolios, our results reveal a trade‐off between the risk premia associated with factors and the diversification potential of sectors. Multifactor investing tends to be more profitable than the benchmark during good times but less attractive during bad times, when diversification is needed the most.