FT: Smart beta funds stalked by chaotic ‘factor zoo’

The Financial Times highlighted new research about the problems with the proliferation of smart beta strategies. Many strategies based on "factors" are not performing as the research and backtesting suggested.

FT: Smart beta funds stalked by chaotic ‘factor zoo’

 

The research warns of a problem with so-called data-mining — when companies keep testing different figures to obtain a desired result. It also found a “lack of robustness in trading strategy performance” when smart beta strategies go live.

According to the study, there was a median 73 per cent deterioration in Sharpe ratios, a measure for calculating risk-adjusted return, between back tested and live performance. Hortense Bioy, director of passive fund research in Europe at Morningstar, says concerns about back testing in smart beta funds are rising. “The joke in the industry is that you’ve never seen a bad back test and you will never see one. Investors should always take back tests with a massive pinch of salt.