Smart Beta Made Smart: Synthetic Risk Factors for Institutional and Retail Investors

69 Pages Posted: 24 Sep 2020 Last revised: 8 Mar 2021

See all articles by Andreas Johansson

Andreas Johansson

Stockholm School of Economics

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: March 7, 2021

Abstract

We construct synthetic, tradable risk factors using optimal combinations of large and liquid mutual funds and ETFs. We find that investors are not able to harvest the unconditional factor risk premia, although the synthetic portfolios of institutional investors outperform those of retail investors. We also propose a methodology to identify market funds. Lastly, we show that (i) daily flows to naive smart beta strategies are more predictable than those to our synthetic strategies, and (ii) our synthetic HML outperforms a naive one based on fund names. Our results have implications for the evaluations of portfolio managers and cross-sectional return anomalies.

Keywords: Smart beta, factor investing, tradable risk premia, daily flows to smart beta strategies

JEL Classification: G11, G12

Suggested Citation

Johansson, Andreas and Sabbatucci, Riccardo and Tamoni, Andrea, Smart Beta Made Smart: Synthetic Risk Factors for Institutional and Retail Investors (March 7, 2021). Swedish House of Finance Research Paper No. 20-21, Available at SSRN: https://ssrn.com/abstract=3594064 or http://dx.doi.org/10.2139/ssrn.3594064

Andreas Johansson

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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