So smart beta is definitely the term of 2013. It rests firmly on the idea that market capitalisation is the wrong way to allocate your money across equity securities. Instead, the answer is to use some other form of weighting methodology. All good so far… The problem arises when you ask what the optimal alternative weighting should be. You get a different answer depending on who you ask. Where have I come across that before. Oh yeah, traditional active management.
Let’s stop kidding ourselves guys, smart beta is just cheap, naive, active quant management. The reason it is cheap is because it has none of the ongoing research that active quant strategies had. Pick your algorithm, stick with it and away you go.
Will it work? Sure! Provided you measure it over the right period, it’ll work. Then it won’t work for a bit, then it will again. Much like active strategies.
Will it work for you? Sure! Provided you know when to switch from one smart beta strategy to another it’ll work. Getting that right will take a lot of ongoing research, which probably won’t come cheap.
So, if you want to solve the problem of how do I not allocate to market capitalisation, smart beta is the one for you. Get on that bandwagon! If you want to add real value to your investments, you haven’t found the holy grail.