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In a new study entitled “Active Allocation to Smart Factor Indices”, drawn from the eponymous Rothschild & Cie research chair, EDHEC-Risk provides a formal empirical analysis of the benefits of strategic and tactical allocation to multiple equity smart factor indices in a context where relative risk with respect to the cap-weighted indices needs to be explicitly controlled for.
Once regarded as exotic curiosities, smart equity factor indices have now made it into the mainstream, and have become important for investors to better understand how their outperformance relates to underlying sources of risk.
The focus of this paper is to provide a quantitative assessment of the benefits expected from the three sources of added-value (which come from time-varying strategic, time-varying tactical or time-varying core-satellite allocation decisions) in the design of equity benchmarks with superior risk and return characteristics.
In this paper, the authors show the benefits that active managers and asset owners can expect from dynamically allocating to smart factor indices, with a focus on efficiently reacting to changes in market conditions, as well as efficiently spending relative risk budgets with respect to a cap-weighted reference portfolio.
A copy of “Active Allocation to Smart Factor Indices” can be downloaded via the following link:
EDHEC Publication Investing: Active Allocation to Smart Factor Indices
This research was supported by Rothschild & Cie as part of the research chair at EDHEC-Risk Institute on “Active Allocation to Smart Factor Indices”. This chair is examining the benefits of smart beta allocation.
