Scientific Beta

Top 1000 Funds: "EDHEC-Risk Institute suggests that investors should be wary when implementing factor tilts to ensure diversification still reigns, and that factor index design does not lead to concentration, which in turn leads to high turnover and investability hurdles."

Top 1000 Funds 11/12/2015

"(...) EDHEC-Risk Institute suggests that investors should be wary when implementing factor tilts to ensure diversification still reigns, and that factor index design does not lead to concentration, which in turn leads to high turnover and investability hurdles. (...) Our recent research, presented in a 2015 EDHEC Risk Institute working paper, has compared the results of smart factor indices with several stylised examples of concentrated factor indices. (...) We observed, for example, that the Lyxor J.P. Morgan Europe Multi-Factor index was very strongly exposed to the risk of the Volkswagen AG stock, as was the MSCI Europe Diversified Multiple-Factor index. As such, these indices respectively contained almost 1.5 and more than 2 times more Volkswagen AG stock than the Stoxx Europe 600, and almost 10 times and 16 times more Volkswagen AG stock than the SciBeta Extended Europe Multi-Beta Multi-Strategy EW index. Since they contain a low effective number of stocks, these indices do not benefit from a deconcentration effect. (...)"