Deconstructing Smart Beta

February 10, 2015

Figure 2
For a larger view, please click on the image above.
Figure 2
For a larger view, please click on the image above.
Exhibit 8 shows that the volatility of the risk premia portfolio was very low during the entire period. Moreover, the maximum drawdown was 2.9 percent.
This compares favorably with the balanced portfolio, which was 3.5 times more volatile and had a drawdown of over 32 percent. If the volatility of the risk premia portfolio were to be scaled to the same level as that of the balanced portfolio, the leveraged risk premia portfolio would have achieved a much higher excess return (15.1 percent p.a. vs. 4.5 percent p.a.).
It is interesting to note that the correlation of the risk premia portfolio with equities was -0.1 over the entire period and this may be the consequence of having a low exposure to traditional market beta risks. Some institutional investors have already started making allocations in risk premia strategies as a low-cost alternative to absolute return strategies.

 

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