Scientific Beta

Funds Europe: "Noël Amenc of the EDHEC-Risk Institute examines risk in smart beta indices and argues that not enough information is made available for investors to assess products."

Funds Europe 08/01/2013

"(…) Noël Amenc of the EDHEC-Risk Institute examines risk in smart beta indices and argues that not enough information is made available for investors to assess products. (...) There has been more talk about the role of beta in asset management recently. From our viewpoint, this is part of an evolution in asset management that perhaps goes further than the growing momentum towards passive investment for cost reasons or doubts over active managers’ fees. The success of smart beta with institutional investors largely outstrips the initial framework that was established for it, namely that of replacing the natural passive investment reference represented by cap-weighted indices. The reason behind the new indices for the vast majority of investors, and doubtless their promoters, is probably the superiority of their performance compared to traditional cap-weighted indices. Everyone agrees that while cap-weighted indices are the best representation of the market, they do not necessarily constitute an efficient benchmark that can be used as a reference for an informed investor’s strategic allocation. Alternative beta, advanced beta and smart beta are responses from the market to a question that has formed the basis of modern portfolio theory since the work of the Nobel Prize winner Harry Markowitz: how to construct an optimally diversified portfolio. Each solution contains risks – systematic risks and specific risks. (...)"