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Smart Beta versus Smart Alpha

12 Pages Posted: 25 Apr 2014 Last revised: 5 May 2014

Bruce I. Jacobs, Ph.D.

Jacobs Levy Equity Management

Kenneth N. Levy

Jacobs Levy Equity Management

Date Written: May 2, 2014

Abstract

Smart beta strategies aim to outperform the capitalization-weighted market through relatively simple alternative weighting methods that emphasize a handful of factors such as size, value, momentum, or low volatility. Because of their simplicity, smart beta strategies bear a resemblance to passive investments. Yet, smart beta strategies are the product of active choices and can be compared with active multifactor strategies (“smart alpha”). When considering any active strategy, investors should have a clear understanding of the sources of expected returns, the stability and sustainability of those returns, the risk exposures and risk controls, the liquidity demands of the strategy, and whether the management costs are commensurate with expected results. Only then can investors determine which strategies are deserving of the “smart” label.

Keywords: Smart Beta, Smart Alpha, Alternative Beta, Passive, Active, Multifactor, Capitalization Weighting, Market Inefficiency, Fundamental Index, Turnover, Disentangling, Pure Returns, Factor Crash, Transparency, Rebalancing, Risk Exposure, Crowding, Beta, Size, Value, Momentum, Low Volatility

JEL Classification: G11

Suggested Citation

Jacobs, Ph.D., Bruce I. and Levy, Kenneth N., Smart Beta versus Smart Alpha (May 2, 2014). Forthcoming, The Journal of Portfolio Management, Vol. 40, No. 4, Summer 2014. Available at SSRN: https://ssrn.com/abstract=2428424

Bruce Jacobs (Contact Author)

Jacobs Levy Equity Management ( email )

100 Campus Drive
P.O. Box 650
Florham Park, NJ 07932-0650
United States
973-410-9222 (Phone)
973-410-9333 (Fax)

HOME PAGE: https://jlem.com/who-we-are#/nav/founders

Kenneth Levy

Jacobs Levy Equity Management ( email )

100 Campus Drive
P.O. Box 650
Florham Park, NJ 07932-0650
United States
973-410-9222 (Phone)
973-410-9333 (Fax)

HOME PAGE: https://jlem.com/who-we-are#/nav/founders

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