Smart Beta 2.0 - EDHEC-Risk

Conclusion: Smart Beta 2.0 — New Ethics in the
Relationship with Investors?
of smart beta strategies be available at
a cost that is not prohibitive and above
all without any particular restrictions on
usage. This is not to deny the economic
value of the data and information but to
consider that an index that is sold as a
reference for the market should be able to
be genuinely analysed and criticised by all
market participants.
The Smart Beta 2.0 approach, which
aims to allow investors to invest in these
advanced forms of benchmarks with full
knowledge while controlling the risks of
their choice, can only be conceived with
an efficient market for indices that are
supposed to represent references for the
implementation of smart beta strategies.
That is why we consider that market
information on the rules and historical
compositions that underlie the
performances of the track records used to
promote these indices is indispensable. 26
methods in order to construct a benchmark
that corresponds to their own choice of
risks. For the sake of transparency about
the risks they are taking, they also need to
be able to analyse risk and performance of
smart beta strategies openly rather than
depend on the sole analysis published by
the providers of particular strategies. It is
against the backdrop of these requirements
from investors that we argue for the need
for a second generation of smart beta
approaches.
In the same way, since Smart Beta 2.0
allows the risks to which investors wish to
be exposed via a smart beta benchmark to
be controlled, it is time to stop continually
equating smart beta strategies with a
predetermined set of risk factors.
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The growing of smart beta strategies offers
interesting opportunities for investors, as
such strategies recognise the importance
of equity portfolio construction (or “beta”)
as a determinant for risk and return of
portfolios over the long run which has been
widely documented in the literature. Given
that some in the industry for a long time
have tended to neglect the importance of
betas due to an exclusive focus on alpha,
increasing the attention to the choice
of betas is a promising development.
However, rather than accepting prepackaged
choices of alternative equity
betas, investors should be able to explore
different smart beta index construction
26 - It is on that basis that EDHEC-Risk Institute will set out a series of initiatives from the second quarter of 2013 to create the conditions for an efficient market of
smart beta indices.