Is Smart Beta just Monkey Business? An Analysis of Factor Exposures, Upside-Down Strategies and Rebalancing Effects

Noël Amenc, Felix Goltz, Ashish Lodh: “Monkey portfolio” proponents argue that all smart beta strategies generate positive value and small-cap exposure, which fully explains their outperformance.

Author(s):

Noel Amenc

Professor of Finance, EDHEC-Risk Institute,CEO, ERI Scientific Beta

Felix Goltz

Head of Applied Research, EDHEC-Risk Institute,Research Director, ERI Scientific Beta

Ashish Lodh

Deputy Research Director, ERI Scientific Beta

They also claim that similar results are obtained by any random portfolio strategy, including the inverse of such strategies. We analyse these claims using test portfolios which follow commonly-employed methodologies for explicit factor-tilted indices. Our results directly invalidate all of these claims. In particular, our results show that, while some strategies, such as fundamental equity indexation, may perhaps be mostly driven by a value tilt and may generate similar performance to their upsidedown counterpart, many smart beta strategies display exposure to additional factors, as well as pronounced differences in factor exposures across different strategies. Moreover, and perhaps reassuringly, the inverse of these strategies generates lower performance. That our findings directly contradict the monkey portfolio claims can be explained by our set of test portfolios. While the monkey portfolio arguments may hold for the particular smart beta specifications tested by its proponents, they do not hold in general. An important implication of our results is that one should take care to avoid over-generalising from testing particular specifications of smart beta. For the explicit factor-tilted strategies tested here, our results imply that a careful assessment of investment philosophy and index design is indeed relevant as such strategies do not behave like monkey portfolios.
Pdf
Is Smart Beta just Monkey Business? An Analysis of Factor Exposures, Upside-Down...
(-1.00 B)
Type: Working paper
Date: le 30/11/2015
Extra information : For more information, please contact EDHEC Research and Development Department [ research@drd.edhec.edu ]
Research Cluster : Finance

See Also

[Student Experience] Immersion trip - Welcome to San Francisco!
News
- 25-05-2018
Immersion Trip abroad: focus on EDHEC students' experience Silicon Valley is well-known...
News
- 25-05-2018
EDHEC-Risk Institute is pleased to announce that Kati Eriksson, Head of Investments, Aalto University Endowment have joined its international advisory board, which brings together...
The EDHEC PhD in Finance Programme adds two new alumni
News
- 21-05-2018
On 17 May 2017, two EDHEC PhD in Finance candidates (executive track), Stefano Dova and...
EDHEC Business School hosts the Family Business Extension  of the 38th Strategic Management Society (SMS) Annual Conference
News
- 18-05-2018
  Like in previous years, the 2018 Family Business Extension will bring together a...