Scientific Beta

Two articles from the second issue of the EDHEC-Risk Institute supplement to AsianInvestor respectively look at different smart beta indices and how they can be diversified, with a focus on the Japanese equity universe, and examine the risk exposures of minimum-volatility equity index strategies which have been highly popular since the financial crisis of 2008, using an illustration from Japan’s equity market before, during and after the Fukushima disaster.

Questions have been raised about market-cap-weighted equity indices which, while they unquestionably remain a good representation of the market average, tend to be poorly diversified portfolios that are not good proxies for the tangency portfolio. In an article published in the October 2013 issue of AsianInvestor EDHEC-Risk Insitute Research Insights focusing on the Japanese equity universe, entitled "Smart-beta diversification indices: a focus on Japan" (pages 11-16), we look at various alternative equity indices, or smart-beta indices, and see how they can be diversified. Controlling the risks of these indices is uppermost in the minds of the researchers.

We also look at the risk exposures of minimum-volatility equity index strategies in an article on "Risk exposures of minimum-volatility index strategies" (pages 17-20). Since the financial crisis of 2008, minimum-volatility strategies have been highly popular. However, the exposure of smart-beta strategies to systematic risk needs to be analysed by investors if they want to make an informed decision concerning the use of any smart-beta strategy. In this second article, we examine this question and include an illustration from Japan, with a special focus on the Fukushima disaster.