Scientific Beta

New Model Adviser: "EDHEC-Risk Institute has developed a new approach to beta investing, dubbed ‘smart beta 2.0’, which allows investors, both institutional and retail via IFAs, to choose and control the risk of benchmarks on its new platform."

New Model Adviser 03/06/2013

"(...) ‘Smart beta strategies are investments solutions that allow investors to access the various long-term true risk premia of the market, profile their risk exposures and diversify away their risks,’ says Fahd Rachidy, senior business development executive at ERI Scientific Beta, the EDHEC-Risk Institute’s recently launched smart beta venture. Determining all the risks involved, however, can be difficult. The construction of smart beta funds often means they are tilted towards certain risk factors and these are not always evident. For example, high-yield funds are vulnerable to dividend cuts and interest rate changes. ‘Smart beta investments (carry) risks associated with their design (specific risk or model risk) and risk of underperformance as different betas will perform differently in different market conditions (systematic risks). Smart beta solutions should be transparent and clearly state risk exposures,’ says Rachidy. EDHEC-Risk Institute has developed a new approach to beta investing, dubbed ‘smart beta 2.0’, which allows investors, both institutional and retail via IFAs, to choose and control the risk of benchmarks on its new platform. ‘The first generation of these indices, or “smart beta 1.0”, benefits from a rules-based approach and low implementation costs, and aims at outperforming cap-weighted indices over the long term,’ says Rachidy. ‘However, smart beta 1.0 indices providers impose the choice of systematic and specific risks upon the investor. Investors should be free to choose the risks to which they wish, or do not wish, to be exposed. The smart beta 2.0 approach aims to control the risks of smart beta investing.’ It is based on three key ingredients: measuring and controlling systematic risks (using two complementary methods: stock selection and implementation of constraints); measuring and controlling the specific risk; and managing tracking error risk. Investors can access 2,442 customised indices on the Scientific Beta platform, and there are plans to increase this number to 6,000 in 18 months’ time. (...)"