Popular analysis might lead to allocation mistakes
Popular factor analysis tools might lead investors to dangerous allocation mistakes, according to smart beta index provider, ERI Scientific Beta.
Its newest study, “Measuring Factor Exposure Better to Manage Factor Allocation Better: A Critical Approach to Popular Box Initiatives”, found there were several new factor tools promoted by investment market leaders as factor risk analysis standards.
However, most of them could lead to serious misalignment between an investor’s factor diversification objectives and the measured and realised allocation.
The findings of the study indicated that:
- These analytic tools did not employ academically-grounded factors and their factor-finding process maximised the risk of ending up with false factors,
- Non-standard factors led to mismeasurement of exposures and may capture exposure to redundant factors,
- The use of factor scores instead of factor betas for the measurement factor exposures was a cause of concern,
- The major drawback factor scores suffered from “double counting” of exposures, which was due to their lack of regard for the correlation structure of factors.
AUTHOR
Oksana Patron
Recommended for you
A hiring spree is expected in private markets with 90 per cent of firms expecting to maintain or increase their headcount over the next 12 months, according to Preqin.
Abrdn Investments has hired a new global chief executive as Rene Buehlmann steps down after less than two years, it also announced a new senior leadership structure.
Having received bids from Bell Financial Group and AxiCorp, trading platform Selfwealth has confirmed it has entered into a scheme implementation deed after both parties were invited to make a higher bid.
Clime Investment Management has faced shareholder backlash around “unsatisfactory” financial results and is enacting cost reductions to return the business to profitability by Q1 2025.
