Scientific Beta

This paper provides an an overview of the conceptual groundings of the Scientific Beta Diversified Multi-Strategy index. It also shows how the Diversified Multi-Strategy weighting scheme can be used to construct smart factor indices – well-diversified factor-tilted portfolios which extract the factor premia by selecting appropriate stocks for the desired beta. Smart factor indices allow high-performance allocations to be constructed either in terms of absolute return (Sharpe ratio) or in relative terms (information ratio) compared to cap-weighted indices, which remain the performance reference for long-only passive investment.

The ERI Scientific Beta Diversified Multi-Strategy index combines, in equal proportions, the Efficient Maximum Sharpe Ratio, the Maximum Deconcentration, the Maximum Decorrelation and the Diversified Risk-Weighted weighting schemes. The combination of these different strategies allows the diversification of risks that are specific to each strategy. Moreover, as the single strategy’s performance will show different profiles of dependence on market conditions, a Multi-Strategy approach can help investors smooth the overall performance across market conditions.

In this paper, we provide an overview of the conceptual groundings of the Scientific Beta Diversified Multi-Strategy index. We also show how the Diversified Multi-Strategy weighting scheme can be used to construct smart factor indices – well-diversified factor-tilted portfolios which extract the factor premia by selecting appropriate stocks for the desired beta. Smart factor indices allow high-performance allocations to be constructed either in terms of absolute return (Sharpe ratio) or in relative terms (information ratio) compared to cap-weighted indices, which remain the performance reference for long-only passive investment.