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In a new study entitled “Do We Need Active Management to Tackle Capacity Issues in Factor Investing? Exposing Flaws in the Analysis of Blitz and Marchesini (2019),” Scientific Beta shows that the argument in Blitz and Marchesini (2019) that active management is needed to avoid capacity issues in factor investing does not hold for the following reasons:
- Systematic rules allow investability to be improved with full transparency. Active management is not only unnecessary; it also creates hidden risks for investors due to a lack of transparency.
- Pre-announcement of index rebalancing trades eases implementation and helps reduce price impact, because it reduces uncertainty for liquidity providers.
- Empirical analysis of Scientific Beta factor indices shows that they avoid capacity problems, and price impact around rebalancing is zero (see the study “Do Factor Indices Suffer from Price Effects around Index Rebalancing?”).
Commenting on the results of this research, Dr Noël Amenc, CEO of Scientific Beta, said, “Although the criticism in the Blitz-Marchesini paper builds on logical fallacies and is not backed by evidence, it does align with intuitive claims about the dangers of indexing. It may be convenient to rely on such intuitive arguments – they correspond to widely held beliefs – but answering questions about investability requires careful analysis of the facts. Index providers and replicators need to offer transparency and evidence to allow for factual analysis. In their due diligence, index investors need to address how the index provider achieves investability and how the passive manager adds value when replicating the index.”
The Scientific Beta white paper can be accessed through the link below:
