Edhec reveals trends in smart beta theory

TrendsSmart beta experts, Professor Noel Amenc and Eric Shribini, revealed how far smart beta has progressed yesterday at an Edhec-Risk Institute conference in London.

They found that the first generation of smart beta strategies either tilted towards better-rewarded investment factors, or aimed at delivering better diversification than investors would get from a cap-weighted index.

Research showed that performance strategies that were better diversified, outperformed factor indices that were tilted towards value over five years.

At one point, Shribini focused on “relative robustness”, which means that the performance of single factor-tilted smart beta indices should be assessed relative to similar factor-tilted indices.

This is in contrast to “absolute robustness” in which the performance of diversified smart beta strategies should be assessed against the cap-weighted index across different market conditions.

Smart beta “2.0”, the next wave of smart beta, is said to address the lack of relative and absolute robustness and can outperform the old model by around 1% a year.

Edhec-Risk Institute has its own smart beta initiative, called ERI Scientific Beta, which produces smart beta indices as part of its offering.

Smart beta is sometimes seen as a cheaper version of active management, or even alpha, but Amenc was adamant this is not the case. Seeing as “academics don’t make bets on the future”, active managers can charge the fees they do.

©2015 funds europe