Understanding Smart Beta

29 Jun 2016 – Smart beta has become the fastest growing segment in the indexing industry and is rich with the possibility of democratising over sixty years of financial research for the benefit of end investors.

However, the simulated nature of the track records of smart beta indices combined with the high degree of opacity maintained by index providers have led to a pronounced lag in the understanding of the sources of performance and risks of these innovations and to reasonable doubts about the robustness of their performance.

In his presentation, Professor Frederic Ducoulombier drew on research conducted at EDHEC-Risk Institute and ERI Scientific Beta to explain how first generation smart beta indices have attempted to address the limitations of traditional indices, introduced a novel framework to design and risk manage smart beta and smart factor indices, looked at the risk and performance characteristics of the second generation of smart beta indices, and discussed the future of smart beta investing:

From active to passive management to smart beta

  • Traditional indices: from investment signals to investment portfolios
  • Alternative indices: beyond the active/passive management dichotomy

From cap-weighted indices to Smart Factor Indices

  • Smart Beta 1.0: Better diversification
  • Smart Beta 2.0: Better factor exposures
  • Smart Beta 2.0: Better factor exposures and diversification
  • Benefits and limits of Smart Factor Investing

From single to multi-factor allocation

  • Smoothing performance through multi-factor allocation
  • Smart Beta 3.0: Risk-based allocation as the next frontier




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