Scientific Beta

Index Universe: "The surveys on smart beta that we do with institutional investors also show that, far from compromising the index business, transparency can accelerate the development of smart beta. It is not very serious to claim to commercialise indices on the basis of outperformance with respect to capitalisation-weighted indices, demonstrated with historical simulations, without giving access to the elements that will allow that outperformance to be checked."

Index Universe 22/11/2013

"(...) Index-based fund management continues to gain traction as investors look for cheaper alternatives to traditional, actively managed funds. But even as their business grows, index providers face a host of new challenges. Regulators have heightened their scrutiny of the indexing business following the LIBOR scandal, there are demands for greater transparency and all market participants face intense competition. The Journal of Indexes Europe asked six index providers—MSCI, S&P Dow Jones, FTSE, Russell, EDHEC-Risk and Bloomberg—how they are facing these challenges and where they see the best prospects for future growth. (...) JoI Europe: How important a trend is ‘smart beta’? Noël Amenc, Chief Executive, ERI Scientific Beta, EDHEC-Risk: The estimated growth of smart beta indexing is more than 50 percent per year for equity indices. In the area of bonds, we feel that the trend is weaker, in spite of the strong expectations from investors, because the weighting methods proposed are less convincing and perhaps not very appropriate for the fixed income universe. It is not enough to transfer a popular concept from equities to make a good fixed income benchmark! The surveys on smart beta that we do with institutional investors also show that, far from compromising the index business, transparency can accelerate the development of smart beta. It is not very serious to claim to commercialise indices on the basis of outperformance with respect to capitalisation-weighted indices, demonstrated with historical simulations, without giving access to the elements that will allow that outperformance to be checked. Today it’s in the area of smart beta indices that the information is most limited, even though those indices are more complex and have been created recently, and so have no real live track record. Here too the regulators’ position should be firm. US regulator FINRA recently provided interpretive guidance regarding the use of pre-inception index performance in institutional communications around exchange-traded products, and this position is perfectly clear—no use of backtests without complete transparency on the methodology and the historical composition of the index. We totally agree with this approach. Here again, if the index providers wish to protect knowledge, legal devices exist and they are not incompatible with transparency, quite the opposite—in exchange for a patent the methods are published. (...)"