8846 how smart is smart beta start 5 itemid 202

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How Smart is ‘Smart Beta’?

Written by David Blitz

  
February 22, 2013

The efficiency of alternative index approaches

 

References

  1. See, for example, Chow, Hsu, Kalesnik & Little (2011), “A Survey of Alternative Equity Index Strategies”, Financial Analysts’ Journal, Vol. 67, No. 5, pp. 37-57.
  2. Blitz (2012), “Strategic Allocation to Premiums in the Equity Market”, Journal of Index Investing, Vol. 2, No. 4, pp. 42-49.
  3. See Asness (2006), “The Value of Fundamental Indexation”, Institutional Investor, (October), pp. 94-99 and Blitz & Swinkels (2008), “Fundamental Indexation: an Active Value Strategy in Disguise”, Journal of Asset Management, Vol. 9, No. 4, pp. 264-269.
  4. Moore (2005), “Fundamental Indexation”, Financial Analysts’ Journal, Vol. 61, No. 2, pp. 83-99.
  5. See Chow, Hsu, Kalesnik & Little (2011), “A Survey of Alternative Equity Index Strategies”, Financial Analysts’ Journal, Vol. 67, No. 5, pp. 37-57.
  6. See de Groot & Huij (2011), “Is the Value Premium Really a Compensation for Distress Risk”, SSRN working paper no. 1840551.
  7. See Blitz, van der Grient & van Vliet (2010), “Fundamental Indexation: Rebalancing Assumptions and Performance”, Journal of Index Investing, Vol. 1, No. 2, pp. 82-88.
  8. We note that although MSCI aims for a one-way turnover of no more than 20% per annum, they have, on several occasions, relaxed this constraint. For example, a methodology change implemented at the end of 2009 caused a turnover of 45% at that moment.
  9. Stock weights in this index are set inversely proportional to their volatility, so the lowest volatility stocks get the highest weights.
  10. This paper was recently published as Soe (2012), “Low-Volatility Portfolio Construction: Ranking versus Optimization”, Journal of Index Investing, Vol. 3, No. 3, pp. 63-73.
  11. For a discussion of the low-volatility premium we refer to Blitz & van Vliet (2007), “The Volatility Effect: Lower Risk Without Lower Return”, Journal of Portfolio Management, Vol. 34, No. 1, pp. 102-113.
  12. See Huij, van Vliet, Zhou & de Groot (2012), “How Distress Improves Low-Volatility Strategies: Lessons Learned Since 2006”, Robeco research note.
  13. See Clarke, de Silva & Thorley (2011), “Minimum Variance, Maximum Diversification, and Risk Parity: An Analytic Perspective”, SSRN working paper no. 1977577. In their Table 2 they report a volatility of 19.0% for a Maximum Diversification strategy applied to U.S. equities over the 1968-2010 period, which compares to a volatility of only 15.6% for the cap-weighted index over the same period.
  14. See Chow, Hsu, Kalesnik & Little (2011), “A Survey of Alternative Equity Index Strategies”, Financial Analysts’ Journal, Vol. 67, No. 5, pp. 37-57.
  15. Returns for this strategy are publicly available on the website of Prof. Kenneth French: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html.
  16. See Blitz, Huij & Martens (2011), “Residual Momentum”, Journal of Empirical Finance, Vol. 18, No. 3, pp. 506-521.
  17. In all fairness, AQR also acknowledges that mechanically following their momentum indices would be a suboptimal approach and recognizes the need for a more efficient implementation strategy.
  18. Quoting Eric Falkenstein: “[…] It should be noted that there were several missteps among the index founding fathers. John McQuown and David Booth at Wells Fargo, and Rex Sinquefield at American National Bank in Chicago, both established the first passive Index Funds in 1973. These were portfolios targeted at institutions. The Wells Fargo fund was initially an equal-weighted fund on all the stocks on the NYSE, which, given the large number of small stocks, and the fact that a price decline meant you should buy more, and at a price increase sell more, proved to be an implementation nightmare. It was replaced with a value-weighted index fund of the S&P500 in 1976, which eliminates this problem. […]” See http://falkenblog.blogspot.nl/2011_09_01_archive.html.

 



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