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Can Competition Increase Profits in Factor Investing?

Author

Listed:
  • Victor DeMiguel

    (London Business School, London NW1 4SA, United Kingdom)

  • Alberto Martín-Utrera

    (Iowa State University, Ames, Iowa 50011)

  • Raman Uppal

    (EDHEC Business School, 59100 Roubaix, France; and Center for Economic and Policy Research, Washington, District of Columbia 20009)

Abstract

The increasing number of institutions exploiting factor-investing strategies raises concerns that competition may erode profits. We use a game-theoretic model to show that, whereas competition among investors exploiting a particular factor erodes profits because of the negative externality of their price impact on each other, competition to exploit other factors can increase profits from the first factor because of the positive externality from trading diversification (netting of trades across factors). Using data for 18 factors as well as mutual fund holdings, we show that competition and trading diversification substantially affect the profits from factor investing.

Suggested Citation

  • Victor DeMiguel & Alberto Martín-Utrera & Raman Uppal, 2025. "Can Competition Increase Profits in Factor Investing?," Management Science, INFORMS, vol. 71(7), pages 5552-5571, July.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:7:p:5552-5571
    DOI: 10.1287/mnsc.2022.02684
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