What Is Value factor?
The value factor captures the long-run tendency of cheap stocks — those with a low price relative to fundamentals such as book value, earnings or cash flow — to outperform expensive (“growth”) stocks. In the Fama-French factors model it is represented by HML (High Minus Low book-to-market), a long-short portfolio long cheap stocks and short expensive ones.
Value is strongly negatively correlated with momentum, which makes the two classic complements in portfolio construction: value typically performs well exactly when momentum suffers a momentum crash. Refined implementations such as AQR’s HML-Devil improve the original HML by using current rather than stale prices.
Example: Green Lark’s Sharpe-optimal long-only factor portfolio gave the value sleeve (HML-Devil) a 31% weight specifically to hedge its large momentum position.
Literature and references:
Eugene F. Fama and Kenneth R. French, The Cross-Section of Expected Stock Returns, Journal of Finance, 1992.
Clifford S. Asness, Tobias J. Moskowitz and Lasse Heje Pedersen, Value and Momentum Everywhere, Journal of Finance, 2013.
See also