Smart Beta versus Smart Alpha

Smart beta aims to outperform the capitalization-weighted market through alternative weighting methods that emphasize factors such as size, value, momentum, or low volatility. Many smart-beta providers claim their strategies beat the market with some consistency, based on historical back-tests. In t...

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Bibliographic Details
Published inJournal of portfolio management Vol. 40; no. 4; p. 4
Main Authors Jacobs, Bruce I, Levy, Kenneth N
Format Journal Article
LanguageEnglish
Published London Pageant Media 01.07.2014
Subjects
Capital assets
Costs
Investment policy
Investments
Portfolio management
Proprietary
Securities markets
Volatility
United States > US
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Summary:Smart beta aims to outperform the capitalization-weighted market through alternative weighting methods that emphasize factors such as size, value, momentum, or low volatility. Many smart-beta providers claim their strategies beat the market with some consistency, based on historical back-tests. In this article, the authors compare the characteristics of smart beta with those of proprietary active multifactor investment strategies, which in the spirit of "smart beta" could be called "smart alpha." Smart alpha includes, but is not limited to, the handful of factors considered by smart beta. Dynamism is built into smart-alpha strategies; for better or worse, smart-beta strategies are static by design. Smart-alpha turnover is generally higher than smart-beta turnover. Smart-alpha strategies are more diversified across factors than are smart-beta strategies, resulting in less-extreme exposures to individual factors. Smart alpha requires greater effort, which results in higher management costs, relative to smart-beta strategies. Only then can investors determine which strategies deserve the "smart" label.
ISSN:0095-4918
2168-8656
DOI:10.3905/jpm.2014.40.4.004