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Newedge: Investors cautiously welcome advanced beta equity investing

First Published 30th July 2015

In a new study produced as part of the Société Générale Prime Services (Newedge) research chair on "Advanced Modelling for Alternative Investments", EDHEC-Risk Institute attempts to give an overall view on alternative equity beta strategies, to determine the areas of usage and to analyse the alternative equity beta practices and perceptions of investment professionals.

Between January and February 2014, EDHEC-Risk Institute carried out a survey among a representative sample of 128 investment professionals to identify their views and uses of alternative equity beta.

Among the key findings of the survey:

  • Investors are familiar with the construction principles of advanced beta strategies, but less familiar with underlying risks and drivers of performance. According to EDHEC-Risk Institute, this lack of knowledge on risks poses a problem not only for the proper use of these alternative equity beta strategies, but also with respect to them being fairly marketed.
  • Respondents allocate relatively few resources to the evaluation of alternative beta. The average respondent uses fewer than two full-time staff (1.77) to evaluate alternative beta offerings, a much lower number than that used to evaluate active managers (3.42).
  • This shortfall in resources is illogical given that the same respondents see bigger challenges when evaluating advanced beta offerings, than when evaluating active products.
  • Lack of access to data, in particular live and after-cost performance, are seen as key challenges, especially as for all types of risks, respondents agree that information is not widely available from product providers.
  • Respondents' answers show that the theoretical justification of a strategy is seen as about as important as live performance, highlighting the need for product providers to focus not only on recent performance but also on the fundamental economic reasons for a strategy's performance benefits.
  • Implementation is a key aspect for respondents, who commonly use a wide array of measures to assess implementation of alternative equity beta strategies (turnover, transaction costs, etc.), implying that product providers need to carefully consider implementation in product design.
  • Respondents prefer long-only strategies to gain exposure to alternative risk premia, in particular due to perceived implementation hurdles for long/short strategies.
  • Respondents require more from factor investing strategies than simply providing the right direction of exposure, notably to provide an efficient risk-adjusted return for a factor exposure, with ease of implementation.

While the survey results suggest that advanced beta equity investing is a promising avenue for the investment industry, results also contain a note of caution, in that there is a risk that the good idea of advanced beta equity investing may end up being compromised by practical investment challenges and perceived insufficiencies of current products, notably in the form of insufficient transparency and on the difficulties in implementing long/short strategies.

A copy of the EDHEC-Risk Institute survey can be found here:

EDHEC Publication Alternative Equity Beta Investing: A Survey