Scientific Beta

Citywire Wealth Manager: "Indeed, the EDHEC-Risk Institute highlighted in a recent paper risks associated with traditional smart beta indices and is proposing a new approach to take account of these risks. The industry body said this new approach, called ‘smart beta 2.0’, will allow investors to measure and control the risks of their benchmark."

Citywire Wealth Manager 19/04/2013

"(…) It would seem ‘smart beta’, then, is perhaps not always as smart as it might appear. Indeed, the EDHEC-Risk Institute highlighted in a recent paper risks associated with traditional smart beta indices and is proposing a new approach to take account of these risks. The industry body said this new approach, called ‘smart beta 2.0’, will allow investors to measure and control the risks of their benchmark. ‘Smart beta 1.0 indices present systematic and specific risks that are neither documented nor explicitly controlled by their promoters,’ EDHEC said. ‘This inadequate level of information, and of risk management, calls into question the robustness of the performance presented and implies considerable risk-taking that is not controlled by investors when they choose new equity benchmarks.’ In a sort of role-reversal, the EDHEC-Risk Institute suggests investors take control of the risk, rather than the index providers. The group recommended the choice of systemic risk factors for smart beta indices not only needs to be clearly explicit, but needs to be made by the investor. ‘The choice, and therefore the associated risk control, is not incompatible with smart beta benchmark performance, as shown by the research results presented in the “Smart Beta 2.0” study,’ the group said. ‘It is thus possible to maintain performance objectives with Smart Beta 2.0 indices without excessively exposing these new benchmarks to size or liquidity risk in comparison with cap-weighted indices.’ "(…)