How do equity factor strategies travel across international markets?

Question

AcadiFi · Accepted Answer

Most equity factors work across markets but with different magnitudes, volatilities, and drawdown timing.

**Summary (1995–2024 annualized premiums)**:

| Factor | US | Int'l Dev | EM |
|---|---|---|---|
| Value | 2.0% | 3.4% | 4.6% |
| Momentum | 6.5% | 8.2% | 9.1% |
| Quality | 3.1% | 3.8% | 4.5% |
| Low Vol | 1.8% | 2.6% | 3.2% |
| Size | 1.4% | 2.1% | 3.8% |

**Why premiums are larger outside the US**:
- Greater inefficiency (less analyst coverage).
- Higher arbitrage costs (shorting harder, liquidity thinner).
- Behavioral biases less arbitraged in EM.
- Fewer quantitative managers deploying capital.

**Why factor VOLATILITIES are also higher**:
- Regime shifts driven by political and monetary policy.
- Currency amplification in USD-reported returns.
- Idiosyncratic country shocks.

**Correlation across regions**: Factor correlations across regions are moderate (~0.4 for value, ~0.5 for momentum). This means multi-region factor portfolios benefit from diversification within the factor exposure itself.

Worked example: Kestrel Global Quant runs a 5-factor portfolio across 3 regions. Integrated (multi-factor) score: 0.25 × value + 0.25 × momentum + 0.20 × quality + 0.15 × low-vol + 0.15 × size. Backtest: US Sharpe 0.58, Int'l Dev Sharpe 0.64, EM Sharpe 0.72. Combined global portfolio Sharpe: 0.78.

**Implementation risks**: Higher transaction costs in EM (50–100bps round trip), custody and tax reclaim frictions, capacity constraints, and occasional political-shock drawdowns.

How do equity factor strategies travel across international markets?

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