I guess my issue is how you define factor loading. If we are doing thought experiments, suppose I select value stocks which are actual value stocks based on P/E or P/S or P/B. Suppose they trade with low correlation to the aggregate value premium. So my value stock is not a value stock? Or suppose that a glamor stock trades very similarly to the price action of a value factor. Should we say that the glamor stock has value risk even though it has no real value to the stock?
Why are we indirectly measuring value stocks by first converting them to a aggregate price series, then comparing value stocks against the aggregate and measuring that risk?
At the heart of this issue is beta. You asked what you get when you have higher beta? It all depends on what school of thought you belong to. We have custom weighting now and with some jiggery-pokery (technical term) you can play around with volatility weighting. But is beta a proxy for actual leverage where 2 Beta trailing translates into 2x the forward returns?
We used a risk model when I was on a project at ClariFi. It seemed like we were simply mixing and matching trailing price returns until we get something that looks dissimilar to some value index and other factor indexes and then we claim unique alpha. All it ever did was water down our best ideas and lower returns into some over-diversified hodge-podge.
It just feels too abstract where we make indirect observations of something to infer its risk when we can directly observe something from the beginning. If I want to know my value risk, I look at the value ranks of the holdings. Whether or not it trades the same as thousands of other value stocks is not what I am interested in. If value stocks become out of favor, chances are mine will too. But if I am holding a glamor stock that is trading with high correlation to a value index, and value goes out of favor, I don’t assume that my glamor stock will go out of favor.
I am not against building a risk model for those who want it. But if there are limited resources for building new tools here, I think we need be sure that there is a market for it and it will be useful for a wide swath of users and profitable for P123 to program. That’s all. I don’t like or use risk models but others might and see value in it.