Scientific Beta

Ignites Europe: "The merits of passive versus active investing have long been the source of heated debate, but the dispute now appears to be spilling over into the indexing community over alternative index strategies. The latest development fueling the debate is a paper sponsored by the EDHEC-Risk Institute that shows a wide variance in six-month returns of four major alternative-indexing methodologies over a period of nine years."

Ignites Europe 10/09/2012

"(...) The merits of passive versus active investing have long been the source of heated debate, but the dispute now appears to be spilling over into the indexing community over alternative index strategies. The latest development fueling the debate is a paper sponsored by the EDHEC-Risk Institute that shows a wide variance in six-month returns of four major alternative-indexing methodologies over a period of nine years. Those strategies included equal-weight, low-volatility, risk-efficient and Research Affiliates fundamentally weighted indices. While all of the indices outperformed the traditional cap-weighted counterparts over the long term, they also underperformed at some point. (...) The EDHEC-Risk Institute researchers argue that one can use a combination of the alternative indices, managing the tracking error to create a portfolio that still outperforms the cap-weighted competition. But it criticises alternative-index devotees that focus more on pure outperformance and less on the relative risk of alternative indices, arguing that managing the difference in risk factor exposure among the alternative indices is the only way to “ensure that the outperformance is based on skill and not luck.”(...)"