ERI Scientific Beta, the smart beta index provider, has announced the launch of a long/short equity market neutral index, the Scientific Beta Developed Multi-Beta Multi-Strategy Managed Volatility L/S Equity Market Neutral Index (x3.5).
The objective of the index is to seek exposure to long-term rewarded factors and a reduction in non-rewarded risks, which associates the factor exposure with good risk-adjusted performance, while at the same time aiming for perfect market neutrality within a universe of large and mid-capitalisation companies from developed countries. The allocation across smart factor indices is implemented with the goal of minimising the volatility of the long/short spread. Return amplification is obtained by the use of 3.5x leverage, maintaining volatility below 8%.
While long/short multi-factor strategies will, by construction, harvest long-term factor premia, such strategies may expose investors to unintended risks due to poor diversification. This risk is all the greater in that long/short strategy providers seek to maximise each factor’s spread through in-sample optimisations that lack robustness, because the selected factor champions are not persistent out of sample. This factor concentration also leads to highly unstable market beta, because the factors naturally exhibit high levels of beta conditionality.
Commenting on the launch, Professor Noël Amenc, CEO of ERI Scientific Beta, said that, “Scientific Beta’s long/short offering corresponds to its investment philosophy: risk management, factor diversification and top-down implementation. The portfolio construction methodology prioritises risk management, which guarantees the robustness of out-of-sample performance. It diversifies across multiple factors to benefit from low correlations across factors rather than concentration in factor champions, which lack consistency and are a source of unstable performance and high turnover. The long/short solution is implemented in a top-down manner to allow dynamic allocation across factors, guarantee transparency and facilitate the search for market beta neutrality.”
Scientific Beta implements its long/short strategy through a short position in the cap-weighted reference index and a quarterly allocation to sub-portfolios in the long leg with the objective of minimising the volatility of the long/short spread under the constraint of factor exposure positivity, diversification across factor indices and market beta neutrality. The long leg sub-portfolios are designed to efficiently capture the long-run factor risk premia that have been documented as being associated with factor tilts (value, momentum, low volatility, high profitability, and low investment).
About ERI Scientific Beta
ERI Scientific Beta aims to be the first provider of a smart beta indices platform to help investors understand and invest in advanced beta equity strategies. It has three principles:
- Choice: A multitude of strategies are available allowing users to build their own benchmark, choosing the risks to which they wish, or do not wish, to be exposed. This approach, which makes investors responsible for their own risk choices, referred to as Smart Beta 2.0, is the core component of the index offerings proposed by ERI Scientific Beta.
- Transparency: The rules for all of the Scientific Beta series are replicable and transparent. The track records of the Scientific Beta indices can be checked and justified through unrestricted access to historical compositions.
- Clarity: Exhaustive explanations of construction methodologies are provided, as well as detailed performance and risk analytics.
Established by EDHEC-Risk Institute, one of the very top academic institutions in the field of fundamental and applied research for the investment industry, ERI Scientific Beta shares the same concern for scientific rigour and veracity, which it applies to all the services that it offers investors and asset managers.
The ERI Scientific Beta offering covers three major services:
- Scientific Beta Indices
Scientific Beta Indices are smart beta indices that aim to be the reference for the investment and analysis of alternative beta strategies. Scientific Beta Indices reflect the state-of-the-art in the construction of different alternative beta strategies and allow for a flexible choice among a wide range of options at each stage of their construction process. This choice enables users of the platform to construct their own benchmark, thus controlling the risks of investing in this new type of beta (Smart Beta 2.0).
Within the framework of Smart Beta 2.0 offerings, ERI Scientific Beta provides access to smart factor indices, which give exposure to risk factors that are well rewarded over the long term while at the same time diversifying away unrewarded specific risks. By combining these smart factor indices, one can design very high performance passive investment solutions.
- Scientific Beta Analytics
Scientific Beta Analytics are detailed analytics and exhaustive information on its smart beta indices to allow investors to evaluate the advanced beta strategies in terms of risk and performance. The analytics capabilities include risk and performance assessments, factor and sector attribution, and relative risk assessment. Scientific Beta Analytics also allow the liquidity, turnover and diversification quality of the indices offered to be analysed. In the same way, analytics provide an evaluation of the probability of out-of-sample outperformance of the various strategies present on the platform.
We believe that it is important for investors to be able to conduct their own analyses, select their preferred time period and choose among a wide range of analytics in order to produce their own picture of strategy performance and risk.
- Scientific Beta Fully-Customised Benchmarks and Smart Beta Solutions is a service proposed by ERI Scientific Beta, and its partners, in the context of an advisory relationship for the construction and implementation of benchmarks specially designed to meet the specific objectives and constraints of investors and asset managers. This service notably offers the possibility of determining specific combinations of factors, considering optimal combinations of smart beta strategies, defining a stock universe specific to the investor, and taking account of specific risk constraints during the benchmark construction process.
With a concern to provide worldwide client servicing, ERI Scientific Beta is present in Boston, London, Nice, Singapore and Tokyo. As of June 30, 2017, the Scientific Beta indices corresponded to USD 16.46bn in assets under replication.
ERI Scientific Beta has a dedicated team of 45 people who cover not only client support from Nice, Singapore and Boston, but also the development, production and promotion of its index offering. ERI Scientific Beta signed the United Nations-supported Principles for Responsible Investment (PRI) on September 27, 2016.