Scientific Beta study shows that conclusions in Robeco researchers' paper are erroneous
Blitz and Marchesini (2019) question the investability of factor indices and argue that active management is needed to avoid capacity issues
A new white paper from Scientific Beta, 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:
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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