Scientific Beta

IPE: " Investors will be able to assess net returns arising from smart beta strategies through a new transaction cost measurement approach put forward by a research paper from EDHEC Risk Institute. Currently, smart beta providers do not routinely report transaction cost estimates for their strategies, and performance evaluation often relies on simulated gross returns, the research said."

IPE 20/03/2017

"(...) Investors will be able to assess net returns arising from smart beta strategies through a new transaction cost measurement approach put forward by a research paper from EDHEC Risk Institute. Currently, smart beta providers do not routinely report transaction cost estimates for their strategies, and performance evaluation often relies on simulated gross returns, the research said. “A reasonable expectation from an investor’s perspective is that providers should disclose the level of transaction costs generated by their strategies so as to allow for information on net returns,” the paper said. The paper – ”Smart Beta Replication Costs” – was written by EDHEC researchers Mikheil Esakiais, Felix Goltz, Sivagaminathan Sivasubramanian, and Jakub Ulahelis. EDHEC said its research provided an “explicit estimate” of costs applied to a range of strategies and showed the impact of using different implementation rules or stock universes. Among the major findings highlighted by the authors, the paper found that conclusions about transaction cost levels and strategy implementation challenges were heavily dependent on the stock universe under consideration. The researchers also found that, for commonly used beta indices built on liquid universes and integrated implementation rules, the impact of transaction costs on returns was small. These costs did not cancel out the relative return benefits over cap-weighted indices. (...)"