Smart beta can be considered an interesting alternative to investing in market-cap weighted indexes.
Smart beta removes the market cap out of the equation and focuses on other factors and on the low volatility, said Rudy de Candé, head of Canada business development with BNP Paribas Investment Partners, speaking Tuesday at the firm’s smart beta event.
“[Smart beta] picked up in 2008 during the financial crisis where investors focused more on risk and volatility and less so on maximizing returns,” he said.
According to BNP’s research, 22% of institutional investors are using smart beta. In the next three years, this will increase to about 50%.
One class of smart beta strategies is risk-based strategies, said Raul Leote de Carvalho, co-head of financial engineering at BNP in Paris. “[These strategies] don’t ask investors for explicit expected returns.”
Research of smart beta strategies has shown that investors can replicate these strategies with factor exposures.
From his point of view, said Carvalho, smart beta is factor investing.
The first generation of smart beta strategies had pitfalls, as they weren’t designed to optimally capture factor alpha, he explained. But the second generation focuses on capturing the factor premiums.
“[Smart beta] is useful for investment portfolios and based on things we’ve known for a very long time,” Carvalho said, “But a lot of smart beta strategies can be improved by factor exposures and improving risk factors.”
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