Scientific Beta

Financial News: "Frédéric Ducoulombier, associate professor of finance at EDHEC Business School, said: “Because smart beta indices are different to cap-weighted ones, they involve different risks that need to be understood. Doubts about the robustness of their performance are the number one stumbling block for investors adopting smart beta strategies.”"

Financial News 09/06/2015

"(...) Frédéric Ducoulombier, associate professor of finance at EDHEC Business School, said: “Because smart beta indices are different to cap-weighted ones, they involve different risks that need to be understood. Doubts about the robustness of their performance are the number one stumbling block for investors adopting smart beta strategies.” According to EDHEC's 2014 European ETF Survey, published in March 2015, 88% of investors agreed that smart beta indices require full transparency on methodology and risk analytics. (...) EDHEC’s research found that investors ranked doubts over the robustness of performance data as their top hurdle to investment. Ducoulombier said: “It’s easier to sell something that has a recent story of success, which creates an inherent conflict for the index providers. If they have created a track record with the benefit of hindsight, there is a high chance the performance displayed will not be robust as it is likely to have exploited methodological leeway to get a good simulated track record. This doesn’t have to be intended. Inside bias can creep in through inadequate attention to quality of data.” Without a higher degree of transparency on index methodology, he argues, investors cannot gauge the ability of an index to perform the same way in similar market conditions and cannot understand how a product would interact with other assets in a portfolio. (...)"