Scientific Beta

Asia Asset Management: "Among such critiques, a recurring issue is the presumption of a risk of “crowding” in smart beta strategies. Unfortunately, while crowding is commonly pointed to as a potential risk, it is rarely formalised or even defined."

Asia Asset Management March 2016

"(...) Smart beta strategies in the equity arena have been finding space between traditional (cap-weighted) passive investments and traditional (proprietary and discretionary) active management. Perhaps unsurprisingly, smart beta draws criticism from providers of both traditional active management and traditional passive management. Proponents of proprietary active strategies complain that smart beta is not active enough while proponents of traditional cap-weighting say that smart beta is not passive enough. Among such critiques, a recurring issue is the presumption of a risk of “crowding” in smart beta strategies. Unfortunately, while crowding is commonly pointed to as a potential risk, it is rarely formalised or even defined. The main idea behind a crowding risk is that, as everyone learns about successful smart beta strategies and increasingly invests in them, flows into these strategies will ultimately cancel out their benefits. (...)"