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Alternative Market Briefing

Evanston Capital examines smart beta returns in new paper

Tuesday, March 22, 2016

Bailey McCann, Opalesque New York:

Peter Hecht, Managing Director at Evanston Capital Management, an alternative investment management firm with approximately $5 billion in assets under management, has released a new white paper looking at the return prospects of smart beta products. Smart beta products were borne out of the original Fama/French market beta factors and have since grown into a multi-billion dollar industry.

The paper looks at the history of smart beta factors and attempts to offer investors some advice about how they can judge the return potential of a smart beta product. Many of these products provide investors with back tested results in order to show how they would have performed in previous market conditions. However, smart beta products are also particularly prone to advantageous data mining, which can lead to the creation of a product that only performs well in an extraordinarily narrow set of circumstances or not at all if it was based on an anomaly in the data.

Further, as has been shown by pioneers in the indexing field, smart beta returns are also prone to popularity related bubbles which can drive up the perceived value of a factor. This can leave investors in the lurch once a factor reverts to the mean.

Hecht argues that it is necessary for investors to correct backtested results in order to understand how products are more likely to perform outside of optimal conditions. He writes: "Conservatively, the out-of-sample results sugg......................

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