Chris Carrano – Designing Practical Factor Models (S7E20) | Flirting with Models

In this episode of "Flirting with Models," Corey Hoffstein interviews Chris Carrano, Vice President of Strategic Research at Venn by Two Sigma, about factor-based investing and risk modeling. Carrano shares his background and how his views on factors have evolved through different roles, from smart beta to long-short hedge funds. The discussion covers the philosophy and design behind Venn, its use of orthogonalized factors, and its approach to reducing overfitting while prioritizing interpretability. They also tackle challenges like analyzing private markets with sparse data and trusting synthetic return streams. The conversation explores how to make factor results actionable through stress testing and portfolio diagnostics, and concludes with Carrano's current obsession: building a Pokemon card index.

Outlines

Sign in to continue reading, translating and more.

Continue

Chris Carrano – Designing Practical Factor Models (S7E20)

Flirting with Models

Introduction to Factors and Chris Carrano's Background

The Institutional Allocator's Perspective on Factor-Based Investing

Venn's Parsimonious Approach to Factor Modeling

LASSO and OLS: Balancing Robustness and Interpretability

Implementation Details and Portfolio Construction of Style Factors

Orthogonalization and its Impact on Factor Interpretability

Factor Concentration in Institutional Portfolios

Addressing Incomplete Transparency with Alternative Investments

Limitations and Validation of Synthetic Return Streams

Interpretability of Factor Results with Asset Allocation Shifts

Educating Users on Interpreting Factor Model Outputs

Stress Testing and Scenario Analysis in the Factor Space

Translating Factor Diagnostics into Actionable Portfolio Decisions

Resources, Pokemon Cards, and Conclusion

Chris Carrano – Designing Practical Factor Models (S7E20)

Flirting with Models

00:00Introduction to Factors and Chris Carrano's Background

Introduction to Factors and Chris Carrano's Background

06:21The Institutional Allocator's Perspective on Factor-Based Investing

The Institutional Allocator's Perspective on Factor-Based Investing

09:34Venn's Parsimonious Approach to Factor Modeling

Venn's Parsimonious Approach to Factor Modeling

12:44LASSO and OLS: Balancing Robustness and Interpretability

LASSO and OLS: Balancing Robustness and Interpretability

16:39Implementation Details and Portfolio Construction of Style Factors

Implementation Details and Portfolio Construction of Style Factors

21:04Orthogonalization and its Impact on Factor Interpretability

Orthogonalization and its Impact on Factor Interpretability

25:02Factor Concentration in Institutional Portfolios

Factor Concentration in Institutional Portfolios

27:34Addressing Incomplete Transparency with Alternative Investments

Addressing Incomplete Transparency with Alternative Investments

33:33Limitations and Validation of Synthetic Return Streams

Limitations and Validation of Synthetic Return Streams

37:54Interpretability of Factor Results with Asset Allocation Shifts

Interpretability of Factor Results with Asset Allocation Shifts

41:37Educating Users on Interpreting Factor Model Outputs

Educating Users on Interpreting Factor Model Outputs

46:02Stress Testing and Scenario Analysis in the Factor Space

Stress Testing and Scenario Analysis in the Factor Space

49:02Translating Factor Diagnostics into Actionable Portfolio Decisions

Translating Factor Diagnostics into Actionable Portfolio Decisions

52:01Resources, Pokemon Cards, and Conclusion

Resources, Pokemon Cards, and Conclusion