EUROPE – EDHEC-Risk Institute has launched a smart beta index platform giving investors the ability to choose and control the risks of those benchmarks.
According to EDHEC, the ERI Scientific Beta provides “total” transparency on the methodologies and compositions of the indices available on the platform.
Noël Amenc, director at EDHEC-Risk Institute and chief executive at ERI Scientific Beta, told IPE investors needed to understand the strategy of alternative indices and the risk associated with them.
“Traditionally, index providers justify the use of alternative benchmarks and their price by saying they outperform cap-weighted indices,” he said.
“However, investors should be aware smart beta benchmarks can also have periods where they underperform.
“The reason for this is not necessarily due to the fact these benchmarks are badly designed but simply because they are exposed to a series of risk factors, called beta.”
Amenc added that, as a result, investors should have access not only to the performance data provided by index providers but also to the risks to which those indices are exposed.
With its new platform, EDHEC will therefore provide its own analysis on each smart beta index.
The provision of information on the flagship indices includes daily transparency and allows all investors to replicate the indices without charge.
Since last week, the institute has been offering 30 flagship indices, which represent popular smart beta strategies in the area of diversification.
However, EDHEC hopes to offer style, fundamentally weighted, factor replication and optimal liquid indices in future.
Amenc added that the platform would grow “extensively” in the coming months.
In a year’s time, ERI Scientific Beta intends to have around 100 free flagship indices representative of all the possible smart beta choices.
EDHEC stressed that all indices would be selected “rigorously”.
It added: “ERI Scientific Beta does not wish to promote strategies that are not based on a rigorously conceptual approach, but only those for which the past performance at least stems from a rigorous and transparent process where the risks have been documented and the methodology does not entail too many ad hoc choices.”
According to EDHEC, these Smart Beta 2.0 indices shield investors from the risks to which the first generation of smart beta indices exposed them.
Amenc went on to say that each institution would be able to tailor its own benchmark by modifying the risk of the standard index, called the flagship index.
“For instance,” he said, “if a pension fund or an asset manager is interested in a global minimum variance index but is less so by the sector risk offered by this benchmark and prefers to be sector neutral, the platform will allow it to change those components.”
Tomas Franzén, chief investment strategist at Swedish buffer fund AP2 and chairman of EDHEC-Risk Institute’s international advisory board, said the Scientific Beta initiative was a “major mover” of the whole concept of using equity indices.
“It is important to better understand the dynamics of different alternative weightings and, at least, to be better prepared for market episodes when market-cap indices actually outperform,” he said.
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