ERI Scientific Beta

Popular factor analysis tools lead investors to dangerous allocation mistakes

Popular factor analysis tools lead investors to dangerous allocation mistakes

In a new research publication, ERI Scientific Beta, the leading smart beta index provider, and Scientific Analytics, EDHEC Business School's new venture dedicated to factor analysis and allocation, have studied popular factor analysis tools available on the market.

The decision to write this white paper was stimulated by the appearance of new factor box tools promoted by investment market leaders as factor risk analysis standards. After serious analysis of these tools, the authors consider that they are not based on an academic state of the art and that their use can lead to serious misalignment between an investor's factor diversification objectives and the measured and realised allocation.

This research paper, entitled "Measuring Factor Exposure Better to Manage Factor Allocation Better: A Critical Approach to Popular Factor Box Initiatives," is accessible through the following link:

Measuring Factor Exposure Better to Manage Factor Allocation Better: A Critical Approach to Popular Factor Box Initiatives, ERI Scientific Beta and Scientific Analytics White Paper

It contains two main contributions, one entitled "Exposed to Nonsense? Spurious Factors in Popular Investment Tools" and the other entitled "Mismeasurement of Factor Exposures in Score-Based Analytics Tools." These two contributions lead to clear conclusions:

These limitations can lead to investors being unable to translate their risk allocation choices into a consistent allocation, with fairly severe financial consequences.


As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
ERI Scientific Beta, 1 George Street, #15-02, Singapore 049145. For further information, please contact: [email protected], Web: www.scientificbeta.com.


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