Fund Model vs LookThrough Model

Why are there two different factor models, and which model does Fabric use?

There are two ways of computing factor exposures for mutual funds and ETFs. One way is via look-through i.e., looking at the underlying holdings of the MF/ETF.  The other way is via the returns (daily/weekly).

In the first case, the factor exposures are computed at the individual asset level and then aggregated to provide factor exposures for the overall fund level. However, this method relies upon access to the underlying holdings data. This data might not be publicly available for Mutual Funds. Hence, relying on holdings data that are not reported on a weekly basis will ultimately lead to unreliable risk estimates.

In the second case, where returns are used, the factor exposures are computed more frequently through a weekly regression. The returns data is received by MSCI through Lipper (See Appendix C in MSCI Fund Model Documentation). Regressing the fund returns against the factor returns weekly gives an accurate estimate of the factor exposures and hence a better estimate of the risk.

At Fabric, we use the Fund model. This helps accurately measure the risk for Mutual Funds and for funds that use other instruments, notably Futures used in CTA strategies.