Scientific Beta

Pensions & Investments: "The solution in general is to “try to diversify the risk of your smart betas,” Mr. Amenc said, advocating for a new generation of indexes called “multibetas.” “This new generation of smart beta indexes combine risk control and ... the choice of exposure to the right factors with the benefits of diversifying away the specific risk” investors don't want, Mr. Amenc said."

Pensions & Investments 21/07/2014

"(...) Noel Amenc, director of EDHEC Risk Institute and CEO of its ERI Scientific Beta unit, both in Nice, France, agrees. Mr. Amenc — who has consulted with Mr. Haque — also suggests an application of smart betas, beyond a single strategy, to achieve what he calls smart beta 2.0. “You will not achieve (relative risk management) with one index. You will achieve that with a diversification across smart betas. So you will have the benefit of (many) smart betas, invested in a well-diversified index ... (and) better risk-adjusted than a normal smart beta strategy,” Mr. Amenc said. (...) Mr. Amenc said using diversified smart beta portfolios can overcome shortcomings. A smart beta that tries to maximize, for example, value exposure could minimize diversification. “What I call smart beta 1.0, the first generation of smart beta indexes, are strategies that either do not explicitly control factor exposure or do not try to provide well-diversified indexes,” Mr. Amenc said in a follow-up e-mail. “When you use (smart beta) indexes, these indexes don't have any objective of diversification and moreover do not use the correlation between stocks. (Smart beta alone) doesn't try to maximize diversification. It just tries to maximize your exposure to value with a selection of criteria that produced good performance in the past.” Other smart betas “try to achieve a diversification objective. But they don't really control for factor exposure, (which) means that sometimes you are exposed to factors you aren't looking for” and that constitute an important driver of the index risk, Mr. Amenc said in the interview. “I'm not saying smart beta is not (capable of achieving) outperformance,” Mr. Amenc said. “I'm just saying it's not a free lunch.” The solution in general is to “try to diversify the risk of your smart betas,” Mr. Amenc said, advocating for a new generation of indexes called “multibetas.” “This new generation of smart beta indexes combine risk control and ... the choice of exposure to the right factors with the benefits of diversifying away the specific risk” investors don't want, Mr. Amenc said. (...)"