Scientific Beta

ETF.com: "According to research from EDHEC, a multi-strategy value index will return 78.8 percent over three years, compared to 69.8 percent from a cap-weighted value index, based on total daily return data from 31 December 1972. The same story can be seen with low volatility – a cap-weighted fund returns 50.1 percent, but a multi-strategy fund jumps to 76.3 percent over the same timeframe."

ETF.com 03/03/2014

"(...) When investing via a smart beta index, an investor should pick a geography, stock selection, a weighting scheme and manage risk factor control; for example, being sector neutral to hedge against certain industries. It’s not just about piling your money into a low vol fund and closing the file for another year. “An investor should look carefully at which factors will be rewarded; there is no absolute truth,” advised Dr Felix Goltz, head of applied research at EDHEC-Risk Institute and research director at ERI Scientific Beta. “You can look at long term data, but at the end of the day it has to do with investor belief. They should do their own investment and come up with their own set of desired factors.” And even if a certain factor is rewarded, an investor might not want to tilt that way as he does not want to take that risk. Again, don’t bury your head in a book to make a decision. “Even if a factor is thoroughly documented, that is not enough to be convinced,” said Goltz. “You can’t conclude from empirical evidence, as research tends to work on similar data sets. It could be a lot of research has gone through the same data and you end up with a data mining problem.” (...)"

"(...) Pushing aside theory for a moment, let’s take a look at performance. According to research from EDHEC, a multi-strategy value index will return 78.8 percent over three years, compared to 69.8 percent from a cap-weighted value index, based on total daily return data from 31 December 1972. The same story can be seen with low volatility – a cap-weighted fund returns 50.1 percent, but a multi-strategy fund jumps to 76.3 percent over the same timeframe. There are several generic reasons a smart beta strategy outperforms a cap-weighted strategy over time. According to Goltz, cap-weighted funds typically have very little or no exposure to a “well rewarded” set of risk factors. “Cap-weighted exposure to value and growth, for example, gives relatively high allocations to very expensive stocks, essentially an overweight to growth stocks,” he said. “With a more neutral exposure to value and growth you could have improved returns.” The second reason is do with cap-weighted strategies’ concentration, as they often have large weights in a small selection of stocks. Stock specific risk can take hold with few opportunities to diversify. Goltz took the example of the S&P 500 Index, which tracks a nominal 500 stocks, but you really end up with exposure to about 220 stocks due to concentration. “Over the long term, the correlation is not expected to give a risk reward ratio which is attractive,” he said. (...)"