Sunday, June 23, 2019

Ghayur et al., Equity Smart Beta and Factor Investing for Practitioners

Equity Smart Beta and Factor Investing for Practitioners by Khalid Ghayur, Ronan G. Heaney, and Stephen C. Platt (Wiley, 2019) is, according to the publisher, the first full-length book on these topics, although scores of papers have been published on smart beta and equity factors. The named authors are all on the Goldman Sachs Alternative Investment Strategies team within its Asset Management’s Quantitative Investment Strategies platform. Several academics and practitioners contributed chapters to this more than 450-page volume, especially in the parts dealing with asset owner perspectives, consultant perspectives, and retail perspectives.

Retail investors are unlikely to profit from this detailed book since, if they commit a portion of their portfolios to smart beta, they will most likely do so through exchange-traded products. As of June 2017, they would have had a choice of 1,320 ETPS and could have paid fees close to those charged by passive funds.

This book is primarily addressed to institutional investors, fund managers, and wealth managers. It covers the field of smart beta investing with the thoroughness one would expect of a Goldman Sachs team, and it answers questions investors and managers (and their clients) might have—and I’m sure many others that never crossed their minds. For instance, it explains smart beta factor return premia, describes weighting schemes and factor specifications, decomposes the risk of smart beta strategies, looks at the performance characteristics both of individual smart beta factors and of factor diversification strategies, and analyzes how to combine smart beta with smart alpha as well as how to incorporate ESG with smart beta.

At the end of the book the authors respond briefly to skepticism about smart beta investing—e.g., that factors are data mined, that some factors are inconsistent with theory, that smart beta is just active management rebranded and repackaged, that factors can’t persist in efficient markets, and that factor persistence will be challenged by crowding.

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