Scientific Beta

The latest issue of the EDHEC Research Insights supplement to Investment & Pensions Europe includes three contributions from Scientific Beta. Articles examine the risks of deviating from academically validated factors, present the framework behind Scientific Beta's defensive offering and look at the importance of consistency in index methodology.

The latest issue of the EDHEC Research Insights supplement to Investment & Pensions Europe includes three contributions from Scientific Beta. 

In the first article, we look at the use of academically grounded factors in investment practice. We observe that the factor finding process often maximises the risk of finding false factors, so most factors used in commercially available tools and products are likely to be false. We conclude that the use of non-standard factors can lead to unintended exposures and misunderstandings concerning the risk exposures.

A second article presents Scientific Beta's defensive offering which relies on three different indices to satisfy investors' various objectives and constraints. In line with the defensive objective, they deliver good levels of volatility reduction and capital protection in bear markets relative to the cap-weighted index.

Lastly, we examine changes that are made to indices. Methodologies of factor-based equity indices undergo frequent changes, leading to inconsistencies over time. Inconsistencies in index methodology make it difficult for investors to evaluate index offerings and may expose them to a risk of relying on spurious performance records.