Towards Second Generation Equity Risk Based Strategies

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See all articles by Raul Leote de Carvalho

Raul Leote de Carvalho

BNP Paribas Asset Management

Lu Xiao

BNP Paribas Investment Partners

Pierre Moulin

BNP Paribas Investment Partners

Date Written: August 26, 2012

Abstract

In this paper we discuss some well-known smart beta strategies like minimum variance, maximum diversification and different forms of risk parity (equal risk budget and equal risk contribution), which we call first generation smart beta. We show that their risk and returns result from exposures to factors such as low risk and size, in particular. However, we highlight a number of issues with these first generation approaches and propose that more efficient second generation smart beta strategies should focus on targeting the desired factor exposures and minimising unwanted risk exposures, e.g. sectors, rather than just on algorithms for portfolio allocation. We give an example of a smart beta low risk strategy that more efficiently captures the low risk factor premium than those above.

Keywords: Low Volatility, Low Risk Anomaly, Minimum Variance, Minimum Volatility, Factor Investing, Equities, Smart Beta, Sectors

JEL Classification: G11, G12, G14, E44

Suggested Citation

Carvalho, Raul Leote de and Xiao, Lu and Moulin, Pierre, Towards Second Generation Equity Risk Based Strategies (August 26, 2012). Available at SSRN: https://ssrn.com/abstract=

Raul Leote de Carvalho (Contact Author)

BNP Paribas Asset Management ( email )

14 rue Bergere
Paris, 75009
France
0033158972183 (Phone)

Lu Xiao

BNP Paribas Investment Partners ( email )

14 rue bergère
Paris, 75009
France

Pierre Moulin

BNP Paribas Investment Partners ( email )

Paris
France

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