Scientific Beta

Benefits and Pensions Monitor: "Factors used in investment practice show a stark mismatch with factors that have been documented by financial economists, says a study from Scientific Beta highlighting the dangers of not adhering to academic consensus when it comes to factor investing. ‘The Risks of Deviating from Academically Validated Factors’ says commercial factors are based on complex composite definitions that offer maximum flexibility. Providers use this flexibility to seek out the factors with the highest performance in a given dataset. However, such practice allows spurious factors to be found."

Benefits and Pensions Monitor 06/03/2019

"(...) Factors used in investment practice show a stark mismatch with factors that have been documented by financial economists, says a study from Scientific Beta highlighting the dangers of not adhering to academic consensus when it comes to factor investing. ‘The Risks of Deviating from Academically Validated Factors’ says commercial factors are based on complex composite definitions that offer maximum flexibility. Providers use this flexibility to seek out the factors with the highest performance in a given dataset. However, such practice allows spurious factors to be found. Spurious factors work well in a small dataset, but will be useless in reality, it says. Therefore, many factors that appear in popular investment products and analytic tools are likely false. And while many providers claim their factors are grounded in academic research, the factor definitions should have been used and validated across different independent studies and a risk-based explanation should support the existence of the factor. Without these assurances, there is no reason to assume the persistence of the factor. (...)"