Scientific Beta

Risk.net: ""What index providers are offering billed as factor investing based on academic consensus is no such thing," says Felix Goltz, head of applied research at EDHEC-Risk Institute in Nice. "The academic consensus exists around half a dozen factors, providing a sort of open-source due diligence for investors," he says. "But index providers have tweaked their definitions of factors to try to make them ‘better’. The problem is, these ‘better’ examples haven't faced the same levels of scrutiny.""

Risk.net 25/01/2017

"(...) Gaps in performance of apparently similar products rekindle debate on index construction. (...) "What index providers are offering billed as factor investing based on academic consensus is no such thing," says Felix Goltz, head of applied research at EDHEC-Risk Institute in Nice. "The academic consensus exists around half a dozen factors, providing a sort of open-source due diligence for investors," he says. "But index providers have tweaked their definitions of factors to try to make them ‘better’. The problem is, these ‘better’ examples haven't faced the same levels of scrutiny." (...) Unlike for active managers, backtests are widely published and used by investors to inform decision-making about passive products, points out Felix Goltz at EDHEC Risk Institute. Goltz calls for providers to document how they ensure backtesting is reliable. "They should explain how factor definitions came about," he says. "Did they pick 50 versions and take the one that looked best? Even large institutional investors don't have the resources to redesign these indexes from scratch and check what the sensitivity is of performance to specific choices." (...)"