Scientific Beta

The latest edition of the Research for Institutional Money Management supplement to P&I contains a number of articles authored by ERI Scientific Beta that examine the hidden risks in factor investing, look at how to assess the investability of smart beta indexes and discuss issues with "bottom-up" approaches to multi-factor equity portfolio construction.

The March 2018 edition of the Research for Institutional Money Management supplement to P&I contains a number of articles authored by ERI Scientific Beta.

Even though gaining explicit exposure to priced risk factors in the equity space is expected to provide good long-term risk-adjusted performance, investing in these factors also exposes the investor to a number of hidden or implicit risks that could be important drivers of short-term performance. In our article, we document and gain a better understanding of these hidden risks.

We assess the investability of smart beta equity strategies, as they naturally incur additional implementation hurdles compared to cap-weighted indexes. While there are different dimensions related to investability, such as liquidity, capacity and transaction costs, it is possible to provide transparency on these dimensions with a range of metrics developed in market microstructure
research. Our article introduces a suite of analytics to enable investors to assess the investability of smart beta indexes.

Multi-factor index providers have been debating the respective merits of the “top-down” and “bottom-up” approaches to multi-factor equity portfolio construction. We review general insights from the literature on return estimation and factor models that are relevant for multi-factor portfolio construction and discuss recent literature that specifically addresses issues with bottom-up portfolio approaches.