Scientific Beta publication tackles the poor recent performance of factor strategies
Performance a consequence of design questions and fiduciary choices and not the factors themselves
A new white paper from Scientific Beta, entitled “What Really Explains the Poor Performance of Factor Strategies over the Last 3 Years?” shows that recent underperformance is not the result of a deterioration in factor performance. Since it has been possible to offset negative performance for some factors through the good performance of other factors, the issues relate more to the factor exposure implementation choices than to the factors themselves. For instance, in the last three years, the non-control of market beta exposure in a bull market context has prevented the vast majority of multi-factor indices on the market from benefitting fully from the important market risk premium. It is this poor market conditionality rather than the variations in factor returns that explains the disappointing performance of long-only factor offerings over this period.
In a long-only framework, index and strategy design rarely takes account of the non-factor risks induced by the factor exposure choices. Among these risks, the market beta risk or gap, which often corresponds to an unstable and defensive bias in the construction of factor strategies, is the one that has the most impact over the long term in terms of both the return and volatility of these strategies and it is the one that is controlled the least.
Commenting on this publication, Noël Amenc, CEO of Scientific Beta, said, “Contrary to what has been affirmed without any really serious study or even rigorous empirical observations, the poor performances of multi-factor indices or solutions are not the result of a strong and abnormal deterioration in factor performances. One can certainly observe that some factors have experienced significant underperformance, but it has been possible to offset this with the performances of other factors. Ultimately, the average risk premium of the consensual six long/short market-neutral factors remains positive.”
The Scientific Beta white paper can be accessed through the link below:
As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up Scientific Beta. Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
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