“Investors need to check strength of smart beta strategies”

Scientific Beta’s latest reasearch has noted the confusion sustained by many providers between real research and pure marketing innovations in smart beta.

“This confusion, which gives the same weight to results with a real academic DNA and ad-hoc choices of models made to optimise performances ex-post is the main source of the lack of reliability and robustness of the simulated track records displayed by numerous smart beta providers,” the company said.

That is why Scientific Beta wishes to enlighten investors on the means for analysing and measuring the robustness of smart beta strategies, along with the ways in which this robustness can be improved.

This was the purpose of a recent Scientific Beta publication in the Summer 2015 edition of the Journal of Index Investing, entitled “Robustness of Smart Beta Strategies”: Robustness of Smart Beta Strategies, Summer 2015, Journal of Index Investing

This publication highlights the importance of a limited choice of factors with simple definitions to avoid the temptations of factor mining or factor fishing, which are among the main causes of the lack of relative out-of-sample robustness of smart beta strategies that are based on factor exposures.

It also underlines the importance of allocating between smart factors that have decorrelated excess returns with respect to cap-weighted indices in order to favour the absolute robustness of the smart beta strategies implemented.

Scientific Beta thinks that the robustness of the performance of smart beta is a key question for investors. With the FTSE Edhec-Risk Efficient Index Series, which is based on a methodology designed by Edhec-Risk Institute, more than five years of live track record exists to show that, whatever the region, the smart beta strategy implemented outperforms the corresponding cap-weighted indices by an average of 2.1%. A summary of the live performances of these indices can be accessed below:

Efficient Maximum Sharpe Ratio Indices: Looking Back at 5 years of Live Performance

But it is in the light of one of the best live track records for smart beta indices that Scientific Beta says that whatever the quality of the live performances exhibited, they cannot replace an in-depth assessment by investors and their consultants of the long-term performances of these attractive new investment offerings.




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