Scientific Beta

Benefits and Pensions Monitor: "New factor box tools are not based on an academic state of the art and their use can lead to serious misalignment between an investor’s factor diversification objectives and the measured and realized allocation, says a research publication by ERI Scientific Beta and Scientific Analytics, the EDHEC Business School’s venture dedicated to factor analysis and allocation."

Benefits and Pensions Monitor 05/11/2018

"(...) New factor box tools are not based on an academic state of the art and their use can lead to serious misalignment between an investor’s factor diversification objectives and the measured and realized allocation, says a research publication by ERI Scientific Beta and Scientific Analytics, the EDHEC Business School’s venture dedicated to factor analysis and allocation. Promoted by investment market leaders as factor risk analysis standards, ‘Measuring Factor Exposure Better to Manage Factor Allocation Better: A Critical Approach to Popular Factor Box Initiatives’ the analytic tools do not employ academically-grounded factors and their factor-finding process maximizes the risk of ending up with false factors; non-standard factors lead to mismeasurement of exposures and may capture exposure to redundant factors; and the use of factor scores instead of factor betas for the measurement of portfolio factor exposures is a cause for concern because factor investing literature uses beta-based models for factor premia tests and for portfolio style analysis. The major drawback of factor scores is “double counting” of exposures, which is due to their lack of regard for the correlation structure of factors. This makes factor scores a very poor proxy for factor betas. These limitations can lead to investors being unable to translate their risk allocation choices into a consistent allocation, with fairly severe financial consequences. (...)"