Scientific Beta

Professional Pensions: "As well as weighting the stocks in an index according to different criteria, alternative indices can also change the universe of the stocks. EDHEC-Risk Institute director of business development Eric Shirbini, says: "The importance of the stock selection is that it allows investors to control the risks in an alternative index."

Professional Pensions 04/07/2013

"(...) It’s not news that standard market capitalisation weighted indices have many flaws: financial academics have been pointing this out for decades. It's only recently, however, that investing in an index formed using alternative criteria has become a viable option for pension schemes. (...) As well as weighting the stocks in an index according to different criteria, alternative indices can also change the universe of the stocks. EDHEC-Risk Institute director of business development Eric Shirbini, says: "The importance of the stock selection is that it allows investors to control the risks in an alternative index." (...) Another consideration for pension funds is that a greater proportion of an alternative index can be invested in illiquid stocks. But this can be corrected. Shirbini says: "This does not have to be a problem for investors. If an investor does not want any exposure to a particular factor then that can be removed from an index or at least reduced." Shirbini adds that investors can adjust for as many factors as they like without being overly concerned about diminishing returns: "An investor might lose some of their returns but they won't be completely wiped out." (...)"