Scientific Beta

Three articles from the third issue of the EDHEC-Risk Institute supplement to AsianInvestor are dedicated to smart beta. The first looks at how to constitute a well diversified smart beta index that diversifies away specific risks and manages exposure to equity risk factors. The second explores the long-term performance and risks of selected smart beta strategies in order to examine the consistency of the performance of these strategies over the long run, and the third consequently looks at the robustness of their outperformance.

In the equity universe, our article entitled "Multi-Beta Multi- Strategy Approach: an Asian Perspective" looks at how to constitute a well diversified smart beta index that diversifies away specific risks and manages exposure to equity risk factors. The results show that smart factor indices allow highperformance allocations to be constructed either in terms of absolute return (Sharpe ratio) or in relative terms (information ratio) compared to capweighted indices, which remain the performance reference for long-only passive investment. Multi-beta multi-strategy indices, which allow smart factor indices to be chosen and combined flexibly, present themselves as more transparent and cost efficient ways for active managers and multi-managers to generate outperformance.

In a second article on "Long-Term Performance of Scientific Beta Indices", we explore the long-term performance and risks of selected smart beta strategies in order to examine the consistency of the performance of these strategies over the long run. Our results show that all strategies analysed not only achieve their respective objectives in the long term but also show high levels of outperformance probability with limited risk of underperformance.

Consequently, in our third article, "How Robust is the Outperformance of Smart Beta Equity Strategies?", we also look at the robustness of the outperformance of smart beta equity strategies. Our article specifically provides a relative risk analysis and an analysis of conditional performance properties of a set of smart beta strategies in the Asian equity universe. Interestingly, the diversified multi-strategy index, which combines five different weighting schemes, shows less dependence on market conditions than its component strategies, since the different conditional performance profiles counterbalance each other when diversifying across strategies.