Scientific Beta

Institutional Asset Manager: "Professor Noël Amenc, director of EDHEC-Risk Institute, says: “It is surprising that very few alternative equity indices which set a target of beating their cap-weighted equivalent benchmark include explicit tracking error constraints in their construction methodology, or provide information on the extreme tracking error risks that they contain."

Institutional Asset Manager 31/08/2012

"(...) A new research paper from the EDHEC-Risk Institute is warning of the risk of new forms of alternative-weighted equity indices seriously underperforming traditional cap-weighted indices. The paper, Diversifying the Diversifiers and Tracking the Tracking Error: Outperforming Cap-Weighted Indices with Limited Risk of Underperformance, shows that the main alternative indices on the market, while superior performers over the long term, have considerable relative drawdowns with regard to their cap-weighted counterparts. These drawdowns can be long (more than two years) and significant (more than 13 per cent). (...) Professor Noël Amenc, director of EDHEC-Risk Institute, says: “It is surprising that very few alternative equity indices which set a target of beating their cap-weighted equivalent benchmark include explicit tracking error constraints in their construction methodology, or provide information on the extreme tracking error risks that they contain. It is time to develop a genuine culture of relative risk management around alternative indices before the tracking error of these promising offerings leads to their demise.” (...)"