Scientific Beta

The latest issue of the EDHEC Research Insights supplement to IPE contains several articles dedicated to the suject of smart beta, notably presenting the results of research on smart beta replication costs with the aim of providing an explicit estimate of costs applied to a range of strategies and showing the impact of using different implementation rules or stock universes, introducing a new approach with the objective of maximising exposure to the long-term rewarded equity factors in a ‘top-down’ framework in a robust and well-diversified manner, and examining the respective merits of the ‘top-down’ and ‘bottom-up’ approaches to multi-factor portfolio construction.

The latest issue of the EDHEC Research Insights supplement to IPE contains several articles dedicated to the suject of smart beta and notably the following:

The results of our research on smart beta replication costs provide an explicit estimate of costs applied to a range of strategies and show the impact of using different implementation rules or stock universes. Importantly, given the transparent methodology and benign data needs, our replication cost analysis is straightforward and can be easily applied to other strategies. This research was produced as part of the Amundi ETF, Indexing & Smart Beta ETF and Passive Investment Strategies research chair at EDHEC-Risk Institute.

We also introduce a new ERI Scientific Beta approach with the objective of maximising exposure to the long-term rewarded equity factors in a ‘top-down’ framework, in a robust and well-diversified manner. Scientific Beta’s Multi-Beta Diversified Max Factor Exposure index dynamically allocates across single-factor indices in order to retain diversification benefits and obtain maximum exposure while maintaining balance across factors and reasonable diversification levels.

Lastly, we examine the respective merits of the ‘top-down’ and ‘bottom-up’ approaches to multi-factor portfolio construction. ‘Top-down’ approaches assemble multi-factor portfolios by combining distinct sleeves for each factor, while the ‘bottom-up’ methods build multi-factor portfolios in a single pass by choosing and/or weighting securities by a composite measure of multi-factor exposures. We find that focusing solely on increasing factor intensity leads to inefficiency in capturing factor premia, as exposure to unrewarded risks more than offsets the benefits of increased factor scores.