EDHEC Risk Institute releases major new research on misconceptions in smart beta investing

The ten misconceptions, in three separate areas of smart beta performance and risk, are the following:

Performance drivers

• The hiding game: "smart beta generates alpha"
• The monkey portfolio claim: "anything beats cap-weighted market indices"
• The value and size myth: "all smart beta performance comes from value and small-cap exposure"
• The rebalancing fantasy: "smart beta outperforms because it trades against mean reversion"

Investability hurdles

• The liquidity concern: "smart beta requires positions to be held in highly illiquid stocks"
• The turnover critique: "smart beta necessarily leads to high turnover"
• The crowding hypothesis: "if everyone knows about smart beta the benefits will disappear"

Strategy design choices

• The concentration fallacy: "a good factor index should provide a strong tilt to the desired factor"
• The factor fishing licence: "a good factor index requires a sophisticated scoring approach"
• The factor purity argument: "a good factor index needs to isolate exposure to the target factor"

The objective of the research is to provide perspective on these beliefs by examining conceptual considerations and empirical evidence. The analysis shows that, more often than not, superficially convincing claims about smart beta strategies stand on shaky foundations. Challenging conventional wisdom by reviewing the extant academic literature and empirical evidence would lead to more balanced conclusions and a more nuanced understanding of the benefits and risks of smart beta strategies.

To view a webinar on "Ten Misconceptions in Smart Beta Investing," please click here.

The "Ten Misconceptions in Smart Beta Investing" research publication is available here.

As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
ERI Scientific Beta, 1 George Street, #07-02, Singapore 049145. For further information, please contact: [email protected], Web: www.scientificbeta.com.

Press_Release_Ten_Misconceptions_Smart_Beta_Publication http://hugin.info/157174/R/2029885/754921.pdf

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