Scientific Beta

An intensive session that will provide participants with an indepth appreciation of the concepts and techniques underlying the new multi-beta multi-strategy benchmark offerings in the equity universe and the use of the open smart beta index platform created, taking place in Boston on 11 March, 2014, New York on 12 March, 2014 and Toronto on 13 March, 2014.

Overview

The Multi-Beta Multi-Strategy Benchmark Construction seminar is an intensive session that will provide participants with an indepth appreciation of the concepts and techniques underlying the new multi-beta multi-strategy benchmark offerings in the equity universe and the use of the open smart beta index platform created. 

• The first part of the seminar presents the smart beta risk allocation framework.
• The second part of the seminar addresses Smart Beta 2.0 and smart beta risk allocation.
• The third part of the seminar deals with smart beta diversification and case studies.
• The fourth part of the seminar discusses implementation of the multi-beta multi-strategy benchmark construction.

In recent years in the United States, Europe and Asia, there has been increasing talk of the pre-eminence of beta in asset management. 

This interest in beta had led not only to considerable development of traditional passive investment based on very low cost replication of market indices, but also to genuine innovation in the area of indices. In a concern to employ the best references for their investments, more and more investors and asset managers have been adopting new forms of better diversified indices, which are consequently described as advanced or smart beta benchmarks.

In fact, 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.

With the development of these new forms of beta, the first question that arises is the risk associated with their performance. Like every investment strategy, smart beta solutions contain risks, which can be classified into two categories: systematic risks and specific risks.

Systematic risks come from the fact that new indices or benchmarks can be more or less exposed to particular rewarded risk factors depending on the methodological choices presiding over their construction; for example, a construction scheme that favours indicators of the firm’s economic size leads more often than not to the index being exposed to style biases. This exposure to risk factors that are rewarded over the long run is one of the main sources of the long-term outperformance of smart beta indices compared to cap-weighted indices. The fact that cap-weighted indices are concentrated in risk factors that are not necessarily the most rewarded over the long run, in large-cap or growth stocks for example, is one of the reasons often mentioned by the asset pricing literature to explain the poorer performance of cap-weighted.

The second source of risk to which smart beta indices are exposed relates to the choice of construction method that aims to extract the best possible risk premium through good portfolio diversification. This extraction exposes the investor to specific risks relating to the construction of the index (strategy-specific risk) or to factors that, while they are not rewarded over the long term, can have a strong influence on the variability of the returns of the smart beta strategy in the short run (sample-specific risk). As such, an efficient minimum volatility index construction method can expose the investor to significant relative sector risks.

In the area of systematic risk, much thought has been given in recent years to the quality of construction of smart beta benchmarks.

The first generation of smart beta benchmarks (1.0), are embedded solutions which do not distinguish the stock picking methodology from the weighting methodology. As such, they oblige the investor to be exposed to particular systematic risks which represent the very source of their performance.

The second generation of smart beta (2.0) clearly distinguishes between the stock selection and weighting phases. In doing so, it enables investors to choose the systematic risks to which they wish to be exposed or not. This choice of risk is expressed firstly by a very specific and controlled definition of the investment universe. An investor wishing to avail of a better diversified benchmark than a cap-weighted index but little inclined to take on liquidity risk can decide to apply this scheme solely to a very liquid selection of stocks. In the same way, investors who want the diversification of their benchmark to lead them to favour stocks with a value bias can absolutely decide that the diversification method that they choose will only be applied to value stocks, etc.

An approach that is consistent with this dimension of rewarded systematic risk choices is efficient allocation to these risks. In a long-only approach, EDHEC-Risk Institute has shown that an efficient allocation over a long period to a benchmark exposed to good choices of factor tilts improves the outperformance with regard to the cap-weighted index that is representative of the investment universe selected.

In recent research published in the Journal of Portfolio Management, we have been able to show that the distinction between the selection and weighting phases (which can be made for most smart beta construction methods) could add value both in terms of performance and in controlling the investment risks. As such, Smart Beta 2.0 provides an answer to the developments in passive investment that make the choice of factor tilts a new frontier for the implementation of a smart factor allocation strategy.

With regard to the specific risks that are not necessarily rewarded, and in line with modern portfolio theory, the goal of the investor should be to lower or indeed to remove them. That is the aim of the diversification of specific risks through diversification of smart beta strategies.

In an article that appeared in the spring 2012 issue of the Journal of Portfolio Management, we showed that good diversification of the allocation to smart beta strategies could significantly reduce the specific risk of the smart beta investment, which is expressed by the tracking error, and at the same time significantly improve the information ratio of the smart beta investment.

It is with this double perspective of efficient long-term allocation to rewarded sources of risk and the reduction, through the diversification of smart beta strategies, of the specific risks, that ERI Scientific Beta has constructed its new offerings, termed Multi-Beta Multi-Strategy Benchmarks, which are the subject of this seminar. 

Programme

Part 1: Smart beta risk allocation framework

Part 2: Smart Beta 2.0 and smart beta risk allocation

Part 3: Smart beta diversification

Part 4: Implementation

Seminar Instructor

Eric Shirbini is Global Product Specialist with ERI Scientific Beta. Prior to joining EDHEC-Risk Institute, Eric was a quantitative analyst at UBS, BNP Paribas and Nomura International. During this time he worked on a diverse range of topics including multi-factor models, fundamental stock valuation, equity market indices, portfolio construction and portfolio trading. At BNP Paribas, Eric managed a team of analysts who were responsible for the Global Equity Research Database. He holds a BSc and PhD from University College London and an MBA from CASS Business School.

Who Should Attend

The programme is intended for all professionals involved in passive investment and active management. More generally, this seminar is intended to be a reference for investment management professionals who advise on or participate in the design and implementation
of asset allocation policies, equity portfolio models, and for sell-side practitioners who develop new equity investment solutions. The approach to diversifying the different forms of smart beta is also of great interest for diversified managers and multi-managers.

Venues and Timing

Schedule:

Registration

Admission to the seminar is complimentary and by invitation only.

To request an invitation, please contact Séverine Anjubault at severine.anjubault@scientificbeta.com or on +33 493 187 863 or click on one of the links below:

Contact

For further information, please contact: