Journal of Indexes

Evaluating Alternative Beta Strategies |

February 24, 2012 |

Comparing approaches to factor indexing Page 2 of 10
Another important observation from Figure 1 is that, similar to the market factor, the small-cap, value, momentum and volatility factors have been very volatile. In other words, the potential reward from systematically tilting the portfolio towards any of these factors can vary significantly from one period to another. The results shown in Figure 1 suggest that these well-known risk factors can all have significant impacts on both the risk and return of equity portfolios.
The authors of several recent studies have compared the increasingly numerous alternative equity beta strategies. For instance, Chow, Hsu, Kalesnik, and Little (2011) surveyed various "Heuristic-Based" (experience-based) and "Optimisation-Based" weighting strategies. Using a four-factor model of market, small-cap, value and momentum, the authors identified the sources of outperformance as exposure to the value and small-cap factors, and found no statistically significant alpha after adjustment for the factor exposures. Melas, Briand and Urwin (2011) proposed a generalised framework and characterised all "Risk-Based" and "Return-Based" strategies as special cases of mean-variance portfolio construction, subject to various assumptions for expected risk and return. Dash and Loggie (2008) suggested that all index weighting schemes can be generalised as being weighted by a certain factor raised to a power; if it is desired to amplify the influence of certain factor, an exponent can be applied. For a larger view, please click on the image above.Comment Using: |