Scientific Beta

aiCIO: "Investors considering smart beta approaches are being swayed by biased sales and marketing techniques as the real risk and performance of strategies is often hidden, a new paper has claimed. Poor information and limited access to data means investors are often left with a skewed version of events, the EDHEC-Risk Institute has claimed."

aiCIO 20/03/2013

"(...) Investors considering smart beta approaches are being swayed by biased sales and marketing techniques as the real risk and performance of strategies is often hidden, a new paper has claimed. Poor information and limited access to data means investors are often left with a skewed version of events, the EDHEC-Risk Institute has claimed. "Investment in smart beta presupposes measurement of the systematic risk factors and integration of the factors, not only in absolute terms to evaluate the real risk-adjusted performance created by better diversification of the benchmark, but also in relative terms to limit the tracking error risk and therefore the risk of underperformance in comparison with the cap-weighted index," the paper said. However, most providers of the strategy are found wanting in this regard, the paper entitled "Smart beta 2.0 - Taking the risks of new equity benchmarks into account" reported. "What is the minimal level of information which the smart beta investor should possess in order to evaluate genuine performance and risks? In the area of smart beta indices, one is forced to conclude that the situation is currently inadequate," the authors asserted. Access to data on performance, composition, and risk of smart beta indices is either restricted by the provider for proprietary reasons, or too costly for an investor, the paper said, which makes analysis and like-for-like comparisons very tricky. Additionally, research on smart beta has not yet reached sufficiency in either volume or quality for investors to make up their own minds, the organisation claimed. (...)"