Scientific Beta

ETF.com: "According to ERI Scientific Beta it is important to trust academic consensus as the number of smart beta indexes and factors are being launched. It says: “The good idea of factor investing should not be transformed into factor fishing and data mining.”"

ETF.com 18/11/2014

"(...) European academic think tank – EDHEC Risk Institute (ERI) – has released a study suggesting that smart beta performance reports should be more robust and not from data mining and non-robust weighting methodologies. The Robustness of Smart Beta Strategies publication is from ERI Scientific Beta, the index arm of ERI, and looks at the importance of robustness, discussing how best to measure and assess robustness when analysing the performance of smart beta strategies. According to ERI Scientific Beta it is important to trust academic consensus as the number of smart beta indexes and factors are being launched. It says: “The good idea of factor investing should not be transformed into factor fishing and data mining.” The report states that the “lack of relative robustness arises mainly from data mining and non-robust weighting methodologies, while the lack of absolute robustness comes from undiversified factor exposures.” The study explains that variables such as sales, dividends, book value and cash flow are used as risk factors by many fundamental factor-based funds and indexes with the idea that fundamental indexes could be high-performance smart proxies for the Value factor. This highlights the importance of measuring robustness correctly. Measuring robustness correctly relies on the transparency of track records and the availability of instruments to actually measure the it, such as the probability of outperformance.(...)"