Scientific Beta

Funds Europe: "ERI’s Scientific Beta platform recently launched a series of “Multi-Beta Multi-Strategy” indices, combining different smart beta strategies into a single index. According to ERI, these indices deliver excess annual return in relation to the cap-weighted equivalent of almost 4%, with an average improvement in the Sharpe ratio – the measure of return versus risk – of 113%."

Funds Europe 17/09/2014

"(…) Smart beta aims to solve two key problems inherent in regular market cap-weighted indices. First, market cap-weighted indices don’t give users exposure to all these other factors. And second, they have the problem of concentration, with a tendency to focus on given stocks and sectors, and so may be unduly affected by what happens to a given company or industry. “The aim is to end up with a well-diversified basket of stocks,” says Felix Goltz, head of applied research at EDHEC-Risk Institute (ERI). “And to understand the risk exposure of each.” All major providers of market cap-weighted indices now provide smart beta measures – even if they call them something else. ERI’s Scientific Beta platform recently launched a series of “Multi-Beta Multi-Strategy” indices, combining different smart beta strategies into a single index. According to ERI, these indices deliver excess annual return in relation to the cap-weighted equivalent of almost 4%, with an average improvement in the Sharpe ratio – the measure of return versus risk – of 113%. (...) The key for anyone looking to employ smart beta is to focus on the intended outcome. It’s a matter of asking whether the index you’re considering using is fit for that objective, and how it will perform – both in the current market environment and in the future. And, of course, being flexible. “A multi-strategy approach is perhaps the most viable,” says Goltz. “Each model has its merits over time, and often at different times, so why not combine them and invest an equal portion into each?” (...) It follows that how you navigate the world of smart beta will largely rest on expertise and experience. The good news is that it’s an adaptable model. “If you take the most common factors, and have no view on a particular diversification model, you can use the index,” says Goltz. “Or if you know more, you can take it as a benchmark, making the adjustments you wish to suit your knowledge and tastes, and measure performance against it. Or act passively, in fund tracking that index. How it’s approached is down to the expertise of the investors.” (...)"