A Framework for Assessing Factors and Implementing Smart Beta Strategies

Journal of Index Investing, vol. 6, no. 1, Summer 2015

Posted: 8 Feb 2017

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Vitali Kalesnik

Research Affiliates LLC

Vivek Viswanathan

Rayliant Global Advisors

Date Written: July 1, 2015

Abstract

Twenty years ago there were only five equity factors (market, value, small-cap, momentum, and low beta). Today the literature contains research papers on hundreds of supposed factors, most of which will not produce a reliable positive premium in the future. Rather than adopting a statistical approach, we propose a three-step heuristic to help investors discriminate between genuine premium-bearing factors and the spurious products of data mining. A robust factor is one whose persistence and economic meaning have been studied in numerous papers published in top-tier journals; whose premium is statistically significant across time periods and in most countries; and whose effect survives reasonable changes in the definition. We also address practical aspects of factor allocation. Appropriate factor allocations depend on the investors’ definition of risk (volatility versus tracking error), risk tolerance, and ability to implement tactical or dynamic allocations, as well as the investment organization’s governance structure and politics.

Suggested Citation

Hsu, Jason C. and Kalesnik, Vitali and Viswanathan, Vivek, A Framework for Assessing Factors and Implementing Smart Beta Strategies (July 1, 2015). Journal of Index Investing, vol. 6, no. 1, Summer 2015. Available at SSRN: https://ssrn.com/abstract=2913304

Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Vitali Kalesnik (Contact Author)

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8717 (Phone)
949-325-8917 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Vivek Viswanathan

Rayliant Global Advisors ( email )

Hong Kong

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