Active Allocation to Smart Factor Indices

Noël Amenc, Guillaume Coqueret, Lionel Martellini: The present publication, “Active Allocation to Smart Factor Indices”, is drawn from the eponymous Rothschild & Cie research chair at EDHEC-Risk Institute.

Author(s):

Noel Amenc

Professor of Finance at EDHEC Business School, Director of EDHEC-Risk Institute, and Chief Executive Officer of ERI Scientific Beta.

Guillaume Coqueret

Senior Quantitative Analyst at EDHEC-Risk Institute.

Lionel Martellini

Professor of Finance at EDHEC Business School and Scientific Director of EDHEC-Risk Institute.

The purpose of this research chair, led by Professor Noël Amenc, Director of EDHEC-Risk Institute, and Professor Lionel Martellini, Scientific Director of EDHEC-Risk Institute, is to support research undertaken at EDHEC-Risk on the benefits of smart beta allocation. The current paper provides a formal empirical analysis of the benefits of strategic and tactical allocation to multiple equity smart factor indices in a context where relative risk with respect to the cap-weighted indices needs to be explicitly controlled for. The focus of this paper is to provide a quantitative assessment of the benefits expected from the three sources of added-value (which come from timevarying strategic, time-varying tactical or time-varying core-satellite allocation decisions) in the design of equity benchmarks with superior risk and return characteristics. The authors show the benefits that active managers and asset owners can expect from dynamically allocating to smart factor indices, with a focus on efficiently reacting to changes in market conditions, as well as efficiently spending relative risk budgets with respect to a cap-weighted reference portfolio.

Type: Position paper
Date: le 06/07/2015
Research Cluster : Finance

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