Scientific Beta warns of factor-investing risks
A Scientific Beta study has highlighted the risks of deviating from academically validated factors and the limitations of many popular factor-investing solutions.
A new study, “The Risks of Deviating from academically Validated factors”, has found the following dangers of not adhering to academic consensus when it came to factor investing:
- Factors used in investment practice showed a stark mismatch with factors that documented by financial economists;
- Commercial factors were based on complex composite definitions that offer maximum flexibility. Providers used this flexibility to seek out the factors with the highest performance in a given dataset; and
- Such practice allowed spurious factors to be found.
This type of practice led to the presentation of in-sample performances that have very little chance of being reproduced out of sample., the firm said.
Commenting on the study, Professor Noël Amenc, chief executive of Scientific Beta, said: “Understanding the factor drivers of returns increases transparency and allows investors to formulate more explicit investment choices.
“However, being aware of exposures to useless factors, which have no reliable link with long-term returns, is pointless.
“For a meaningful contribution to the ability of investors to make explicit investment choices, factor investing should focus on persistent and externally validated factors. It is time to recall the good idea of factor investing.”
AUTHOR
Oksana Patron
Recommended for you
Two former senior Global X employees have launched their own ETF provider, ETF Shares, focused on offering index ETFs for advisers and retail investors.
With GCQ Funds Management and Lakehouse Capital making their recent ETF debuts, the two fund managers unpack why financial advisers are essential to their respective launches.
ETF provider Global X is set to launch its latest ETF, focused on artificial intelligence infrastructure.
Index provider MSCI has unveiled two measures to make it easier for financial advisers and wealth managers to access transparent insights into private assets.
