Hidden Risks Of Smart Beta Misunderstood

"(...) Scientific Beta is warning of the dangers of the main hidden risks that can be important drivers of short-term performance in the smart beta space. Its white paper, ‘Misconceptions and Mis-selling in Smart Beta: Improving the Risk Conversation in the Smart Beta Space,’ identifies these as market risk bias, macroeconomic risks, and sector/geographical risks. Since decisions on selecting a smart beta strategy are often driven more by looking at fees and past performance than by analysing risks, the risk implications of smart beta are not fully understood. In particular, smart beta strategies not only deliver explicit factor exposures (such as value, momentum, etc.), but also lead to implicit exposures. Noël Amenc, CEO of ERI Scientific Beta, says, “To reconcile such risk exposures with investors’ preferences, it is crucial that they be well-documented. Ultimately, the choice on managing these risks is a key fiduciary decision that cannot be left to the discretion of an index provider that has no status to do so. Asset owners should also start improving governance practices by starting a risk conversation on smart beta investments with stakeholders.” (...)"