Fri, Aug 28, 2015
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

EDHEC-Risk proposes new approach to smart beta investing

Monday, March 18, 2013
Opalesque Industry Update- In research published today entitled, “Smart Beta 2.0,” EDHEC-Risk Institute is seeking to draw the attention of investors to the risks of traditional smart beta equity indices and propose a new approach to smart beta investing to take account of these risks.

This new approach, referred to as “Smart Beta 2.0,” enables investors to measure and control the risks of their benchmark and revolutionises the offerings of advanced equity benchmarks.

In their study, Noël Amenc, Felix Goltz and Lionel Martellini show that Smart Beta 1.0 indices present systematic and specific risks that are neither documented nor explicitly controlled by their promoters.

This inadequate level of information and of risk management calls into question the robustness of the performance presented and implies considerable risk-taking that is not controlled by investors when they choose new equity benchmarks.

In order to deal with this situation, EDHEC-Risk Institute recommends that the choice of systematic risk factors for smart beta benchmarks be clearly explicit. This choice should be made by the investor and not by the index promoter.

The choice, and therefore the associated risk control, is not incompatible with smart beta benchmark performance, as shown by the research results presented in the “Smart Beta 2.0” study. It is thus possible to maintain performance objectives with Smart Beta 2.0 indices without excessively exposing these new benchmarks to size or liquidity risk in comparison with cap-weighted indices.

The “Smart Beta 2.0” study also presents the initial results of the research conducted by EDHEC-Risk Institute in identifying and measuring what is called the “specific” risk of smart beta strategies. This specific risk, which is often characterised as model and parameter estimation risk, can not only be measured, but also managed. The authors show that good diversification of the specific risk of various smart beta weighting schemes significantly lowers the specific risk of smart beta benchmarks.

Finally, in order to deal with a risk of underperforming cap-weighted indices, EDHEC-Risk Institute proposes a method for controlling the extreme tracking error of smart beta indices compared to their cap-weighted equivalents. This tracking error control seems to be a welcome response to the desire of many investors to replace benchmarked asset managers with smart beta strategies in order to outperform market indices over the long term while maintaining a guarantee against excessive short-term underperformance when the market conditions are favourable towards cap-weighted indices.

Concluding on their new Smart Beta 2.0 approach, the EDHEC-Risk Institute researchers reiterate their call for full transparency both in the area of methods and in the composition of indices. More information is indispensable in the creation of an efficient market for smart beta indices that will help investors to make clear choices, notably in terms of risks, when choosing and customising their new benchmarks.

A copy of the study is available by clicking on the following link: EDHEC-Risk Institute Position Paper Smart Beta 2.0

Press release

www.edhec-risk.com

Bg

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Commodities - Commodity hedge funds lose most in three years as rout deepens, Funds bet on Shell deal as oil prices plunge[more]

    Commodity hedge funds lose most in three years as rout deepens From Bloomberg.com: Hedge funds betting on commodities lost the most in almost three years in July as the price-rout deepened. Funds lost money for a third month, according to the Newedge Commodity Trading Index, which was re

  2. Investing - Hedge funds suddenly find real money is back in Argentina's debt, Elon Musk buys more SolarCity stock following hedge fund manager short, BlackRock plans to get into rental-home financing[more]

    Hedge funds suddenly find real money is back in Argentina's debt From Bloomberg.com: The real money is back in Argentina. Before the country’s default in July 2014 (its second in 13 years), most long-term investors abandoned its bond market. As they rushed out, Argentina became a favorit

  3. JTC acquires Kleinwort Benson’s fund administration business[more]

    Bailey McCann, Opalesque New York: JTC has completed the acquisition of Kleinwort Benson’s fund administration business, boosting assets under administration (AuA) to $56 billion. Kleinwort Benson is based in the Channel Islands, South Africa. The transaction, which relates to the whole of K

  4. Performance - Hedge funds set to bank millions by short selling during London share slump, The China market chaos has made this hedge fund its most money in 2 years, Odey hedge fund said to surge 9% betting against China, Hedge funds with long-held bearish views on China rack up profits, Hedge funds in U.S. seen curbing damage from August turbulence, Hedge funds collect on their predictions of a fall, How did managed futures do while the Dow was down 1000[more]

    Hedge funds set to bank millions by short selling during London share slump From TheGuardian.com: Hedge funds are set to bank tens of millions of pounds from the slump in share prices in London, having bet almost £18bn that the FTSE 100 would fall. The funds making the bets include Lansd

  5. Opalesque Exclusive: John C Head IV leaves alternative investment firm Gallery Capital, David Harrison joins as co-CIO[more]

    Benedicte Gravrand, Opalesque Geneva for New Managers: John C Head IV, former president and co-founder of Gallery Capital Management, an alternative inv

 

banner