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Alternative Market Briefing

Implementing smart beta may impact on hedge funds finds Towers Watson

Wednesday, October 02, 2013

Beverly Chandler, Opalesque London:

New research from Towers Watson looks at smart beta strategies across a range of traditional and alternative asset classes. The firm writes that it has been working with the investment industry to move smart beta beyond theory to implementation.

"For something 'smart’, we believe it is really quite simple" they write. Smart beta gives the investor the opportunity to capture a:

  • Wider spread of risk premia than conventional strategies, or
  • Risk premium previously only available through expensive active strategies in a cheaper way.

Smart beta strategies may have one or more of the following features:
  • Captures existing (or alternative) risk premia (some of which might have been 'hidden’ in active management).
  • Improves portfolio diversity.
  • Captures long-term investment themes that some other investors are not well placed to exploit.
  • Improves implementation versus market capitalisation.

Towers Watson believes that smart beta strategies should be simple, low cost, transparent and systematic. "To believe in the smart beta proposition, one must first accept that there is a wider framework than the narrow definitions of alpha and beta that classic finance theory puts forward. In this framework, somewhere between alpha and beta, lies smart bet......................

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