Scientific Beta

Top 1000 Funds: "Systematic equity investment strategies – so-called smart beta strategies – are usually marketed on the basis of outperformance. However, it is important to recognise that performance analysis is typically conducted on backtests that apply the smart beta methodology to historical stock returns. Concerning actual investment decisions, a relevant question, therefore, is how robust the outperformance is, writes Felix Goltz."

Top 1000 Funds 02/10/2015

"(...) Systematic equity investment strategies – so-called smart beta strategies – are usually marketed on the basis of outperformance. However, it is important to recognise that performance analysis is typically conducted on backtests that apply the smart beta methodology to historical stock returns. Concerning actual investment decisions, a relevant question, therefore, is how robust the outperformance is, writes Felix Goltz. In general, robustness refers to the capacity of a system to perform effectively in a constantly changing environment. For smart beta strategies, we distinguish between ‘relative robustness’ and ‘absolute robustness’. A strategy is assumed to be ‘relatively robust’ if it is able to deliver similar outperformance in similar market conditions. Single factor indices aim to achieve this kind of robustness. Absolute robustness is the absence of pronounced state and/or time dependencies and a strategy shown to outperform irrespective of prevailing market conditions. Multi-factor indices often aim to improve absolute robustness. (...)"