Smart beta investors taking 'considerable' risk

Risk1Index promoters do not document or explicitly control risks within their smart beta index offerings, researchers claim, which means that investors are taking a “considerable” risk when they choose these new equity benchmarks. The Edhec-Risk Institute says the “inadequate” levels of information and risk management about smart beta indices “calls into question” the robustness of their performance. Smart beta indices have risen in popularity in recent years, propelled partly by the hunt for outperformance against traditional benchmarks for fees cheaper than those that active managers charge. A senior manager in the exchange-traded fund (ETF) industry, who did not want to be named, tells Funds Europe that risks such as liquidity are not always highlighted by index providers when they sell their products to users. Performance looks great on paper but then you drill down you see that in certain market conditions some securities were difficult to get out of, making an index too risky.” ETF providers are users of smart beta indices and a hallmark of the industry is transparency. In a study - Smart Beta 2.0 - Edhec researchers Noël Amenc, Felix Goltz and Lionel Martellini say that to deal with the problem, the choice of systematic risk factors for smart beta benchmarks should be made explicitly clear. Also, the choice should be made by the investor and not by the index promoter, they say. However, the researchers add that the choice of systemic risk factor, and therefore the associated risk control, is compatible with smart beta benchmark performance, meaning it is possible to maintain performance objectives with so-called smart beta 2.0 indices without excessively exposing these new benchmarks to size or liquidity risk in comparison with cap-weighted indices. Funds Europe contacted two major index providers but had not received comment by deadline.
©2013 funds europe    

Executive Interviews

INTERVIEW: Put your money where your mouth is

Jun 10, 2016

At Kempen Capital Management, they believe portfolio managers should invest in their own funds. David Stevenson talks to Lars Dijkstra, CIO of the €42 billion manager.

EXECUTIVE INTERVIEW: ‘Volatility is the name of the game’

May 13, 2016

Axa Investment Managers chief executive officer, Andrea Rossi, talks to David Stevenson about bringing all his firm’s subsidiaries under one name and the opportunities that a difficult market...


ROUNDTABLE: Beyond the hype

Oct 13, 2016

The use of smart beta investing continues to grow. Our panel, made up of both providers and users, discusses what the strategy actually means, how it should be used and the kind of pitfalls that may arise when using this innovative investment technique.

MIFID II ROUNDTABLE: Following the direction of travel

Sep 07, 2016

Fund management firms Aberdeen and HSBC Global meet with specialist providers to speak about how the industry is evolving towards MiFID II.