Research crushes simplistic explanations of smart beta performance

ERI Scientific Beta, part of the Edhec-Risk Institute, has published a new research rejecting simplistic explanations of smart beta performance.

The study, entitled “Smart Beta is not Monkey Business,”  rejects arguments claiming that all smart beta strategies generate positive value and small-cap exposure, which fully explains their outperformance, and also that similar results are obtained by any random portfolio strategy, including the inverse of such strategies.

“The “monkey” label comes from the idea that a monkey would be able to generate similar performance through a random selection of stocks,” said the ERI Scientific Beta.

Its paper analyses these claims using test portfolios which follow commonly-employed methodologies for explicit factor-tilted indices.

Results invalidate all of the claims. ERI Scientific Beta has found out that many smart beta strategies display exposure to factors other than value or small cap, as well as pronounced differences in factor exposures across different strategies.

The research also highlights that the inverse of smart beta strategies generates inferior performance.

The study can be downloaded through the following link:

Adrien Paredes-Vanheule
Adrien Paredes-Vanheule is French-Speaking Europe Correspondent for InvestmentEurope, covering France, Belgium, Geneva and Monaco. Prior to joining InvestmentEurope, he spent almost five years writing for various publications in Monaco, primarily as a criminal and financial court reporter. Before that, he worked for newspapers and radio stations in France, in particular in Lyon.

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