Edhec-Risk Challenges Commercial Index Firms’ Business Models

Edhec-Risk Institute is set to offer investors free access to data on a wide range of so-called “smart beta” indices, in a move that is likely to put major pressure on commercial index providers’ business models.

Edhec-Risk, the financial research institute of France-based Edhec business school, says it will shortly publish a wide range of data covering popular smart beta equity indices on a new website, scientificbeta.com.

The launch, which is expected to take place in the second quarter of this year, is part of a broader drive by Edhec-Risk for increased transparency in the indexing sector. Earlier this week the institute said that regulators should insist on the full transparency of financial benchmarks to allow index users to assess the risks they incur.

Smart beta indices are indices that depart from the traditional methodology of weighting constituents by their market size. The smart beta category includes a wide range of construction techniques, including low-volatility, minimum variance, fundamental indexation, and value and momentum “factor” indices.

Smart beta is attracting significant interest from investors disillusioned by the high cost of active management and interested in pursuing similar strategies in a low-cost, replicable index format.

However, smart beta indices have up to now been offered on a commercial basis by traditional index firms, who charge licensing fees for access to index information, including performance, constituent and weighting data, construction methodologies and risk metrics.

Such licensing fees are often charged on the basis of a percentage share of assets under management, often amounting to multi-million revenues for the firms concerned.

By contrast, Edhec says it will shortly give investors free access to the information and data used in over thirty popular smart beta strategies. The institute says it may charge a small fee to those looking to replicate indices and requiring advance information on index rebalancings and corporate actions, but will only aim to pass on the costs it incurs.

Speaking at a press conference held in London on March 14, Noel Amenc, professor of finance at Edhec Business School, said: “The free data we are putting out represent a first, and will enable investors to view the risks and adapt their investments to suit their views.”

Amenc and his 25-strong indexing team at Edhec say they will also shortly introduce a new approach to smart beta investing, taking account of indices’ liquidity risk, sector exposures, systematic and specific risks.

Amenc said: “There is currently an inadequate level of information and of risk management in indexing. This makes it hard to assess how robust an index’s suggested performance is and implies considerable risk-taking that is not controlled by investors when they choose new equity benchmarks.

“In order to deal with this situation, we recommend that the choice of systematic risk factors for smart beta benchmarks be clearly explicit—a choice that should be made by the investors and not the index provider,” he said.

Edhec’s move comes at a time when index providers are under pressure from regulators to increase the transparency of their index methodologies.

Last year ESMA, Europe’s securities market regulator, announced that the managers of Europe’s UCITS funds should provide free and easy access to the full calculation methodology, constituents and weights of each index in which a UCITS is invested, as well as free access to performance information.

At the time Edhec-Risk reported that (on the basis of a study of 50 equity indices, measured against 76 transparency criteria) most index providers currently fail to provide information beyond a list of current constituents, with details of historical constituents and their weightings often only available to those willing to pay licensing fees and agreeing not to republish information.

[yasr_overall_rating size="large"]
error: Alert: Content is protected !!