Why Factor Awareness Is Simpler Than You Think

Many managers believe their portfolios are idiosyncratic. And on the surface, they often are: name-driven, thesis-specific, conviction-led. But when markets move sharply or when performance starts to sag, those same portfolios often behave like something else entirely.

That disconnect usually comes down to one obvious thing: unmeasured exposure.

Managers who don’t track their factor loadings can’t see when their ideas start to concentrate. They miss the correlations that creep in by assuming risk is where they placed it – until something breaks.

The Myth of Pure Idiosyncrasy

Even the best single-name ideas still load on known factors. A long in a high-growth software company probably brings duration risk. A short in a regional bank likely loads on value or credit. You can be right on the fundamentals and still get caught out by a macro move that has nothing to do with your thesis.

None of this makes factor exposure a problem in itself. It’s just a reality of how markets work. What matters is whether you see it coming and whether you’re prepared to talk about it when it shows up. Because the moment your book starts moving in sync with something you don’t control, and someone else notices before you do, that’s when questions get harder to answer.

You Can’t Manage What You Don’t Measure

A drawdown you can’t explain is worse than the drawdown itself. If you don’t know how much of your portfolio leans into growth, value, or momentum, you won’t know how to respond when those factors swing.

More importantly: you won’t know how to communicate what just happened externally.

Allocators don’t expect perfection, only coherence. Being able to say, “We had a tilt to quality that hurt us when the market flipped to risk-on,” is a world apart from vague commentary about volatility or macro conditions.

What Factor Awareness Enables

You don’t need to be a quant shop to use factor tools. Factor awareness sounds more sophisticated than it really is; at its core, it’s just a way to see what’s actually in the portfolio, not just what you meant to put there.

Even a basic layer of factor tracking can unlock:

• Smarter sizing: Positions that look different on paper often behave the same when viewed through a factor lens. When you understand those shared exposures, you can avoid accidental risk stacking and keep your book balanced.
• Targeted hedging: You don’t need to hedge everything. But when one exposure starts to dominate the portfolio—intentionally or not—you want to be able to neutralize just that part. Factor tracking helps you isolate the signal.
• Better client communication: Investors don’t expect you to avoid every loss, but they expect to understand what happened when you don’t. When you comprehend how factor movements shaped your returns, you can offer explanations that go deeper than surface-level commentary.

Clarity Over Control

Eliminating factor risk is not the point. What matters is recognizing it, accounting for it, and deciding how much you’re willing to live with. Most managers can live with risk, but what rattles them (and their investors) is not knowing where it came from.

Finally: a drawdown is one thing, but a drawdown that catches you off guard, with no clear story, is another. If you want to manage risk, you have to start by seeing it. If you didn’t see your exposure coming, you can’t explain it, let alone hedge it.

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Kevin Becker is a Co-Founder and CEO of Kiski. Connect with him on LinkedIn here.