Factor Risk Management: Tactical Limits, Strategic Constraints, and Systematic Hedging

A fundamental equity PM building positions in companies she understands is simultaneously, without deciding to, building exposure to momentum, beta, short interest, and industry factors she has no edge in. These unintended exposures are silent PnL destroyers: they add return volatility, reduce the Sharpe ratio, and periodically produce large losses during factor rotation episodes. Managing factor risk is not an optional refinement — it is the difference between a fund that delivers its idiosyncratic alpha to investors and one that delivers idiosyncratic alpha minus a series of factor-driven disasters.

1. The PnL decomposition
2. Tactical factor risk management
3. Strategic factor risk limits