Smart Beta

In: Business and Management

Submitted By chineselau
Words 521
Pages 3
Thoughts on Smart Beta
Chao Liu
May 22 2014 The two articles in FT introduce the recent popular investment strategy: smart beta. Smart beta concept is growing popularity across the world because it has allegedly been providing investors risk-adjust excess return. Some consider smart beta approach as a strategy lies between traditional active management in which the fund managers actively pick stocks for their portfolios, and the passive management in which the investor simply replicate the market index. One way to create smart beta portfolios is to substitute the market cap weighting method with an alternative weighting, and the other more popular way is to track certain stocks or certain parts of the market using certain risk factors. These certain risk factors have been recognized to provide risk premium in academia. For example, we have learned in this semester that there are many return anomalies existed in past several decades such as small cap stock, value stock and momentum effect. Those factors are not new to investors, so investors can decide whether take these factors into consideration when forming their investment portfolios. The central questions to ask are: What sources of returns are accounted for smart beta strategies? Can smart beta strategies offer consistent higher risk-adjusted return over time? From the perspective of efficient market theory, any excess return over a market index is due to higher risk bearing. As we can learn from the two FT articles, the answer to the first question is debatable and unsolved. Supporters believe smart beta offers additional returns that are not result of bearing additional risk. On the contrary, critics believe smart beta has risk similar to active managers because smart beta involves stock selections. However, the trend of using smart beta strategies is building up as smart beta at least provides an…...

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