Dumb beta

Monday, February 29, 2016 | 0 comments »



The attraction of a set of fixed factor criteria that lead to trading out-performance is strong and perennial. Unfortunately, the factors underlying the out-performance are not.

Smart beta is a case in point. The smart beta approach gives greater weighting to companies manifesting factors deemed key to out-performance. These might, for example, be low P/E or P/S ratios, companies delivering earnings surprises, relative strength stocks and so on.

Sadly, stability is not a characteristic of any such factors. Their very popularity will see to that; and if it does not anything else leading to a change in market regime will. So “smart” should more accurately be called “alternative” (or even “dumb”).

Indeed, at least one study has shown they do not outperform their benchmarks on a risk-adjusted basis.

Alternative beta is no substitute to dynamic (and proprietary) strategies. Such approaches continuously monitor changes in relationships and shift to the most profitable. If you have one keep it proprietary!

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