Scientific Beta

Funds Europe: "As factor-based investing gains ground, the EDHEC-Risk Institute says investors need to be wary of influences, such as data mining, that can thwart efficacy of a factor."

Funds Europe November 2014

"(…) As factor-based investing gains ground, the EDHEC-Risk Institute says investors need to be wary of influences, such as data mining, that can thwart efficacy of a factor. Institutional investors have started to review factor-based equity investment strategies. The parliament of Norway, which acts as a trustee for the Norwegian Oil Fund, has commissioned a report on the investment returns of the fund. This report was requested after the fund’s performance fell short of the performance of popular equity market benchmarks. The report shows that the returns relative to a cap-weighted benchmark of the fund’s actively-managed portfolio can be explained by exposure to a set of well-documented alternative risk factors. After taking into account such exposures, active management did not have any meaningful effect on the risk and return of the portfolio. The authors argue that such exposures can be obtained through purely systematic strategies without a need to rely on active management. Therefore, rather than simply observing the factor tilts brought by active managers ex-post, investors may consider which factors they wish to tilt towards and make explicit decisions on these tilts. (...)"