While beta is a measure of a fund’s or product’s relative volatility compared to the market as a whole, smart beta is the categorisation of strategies using rule-based screens to attempt to outperform the market, as opposed to the capitalisation-weighted indexes used by passive funds. Derived from economic research, characteristics believed to reduce risk, enhance returns or increase diversification are being used alongside advances in Big Data technology and data analytics to deliver hybrid active-passive strategies at lower cost relative to active funds. As such, smart beta is an investment strategy that is witnessing an increasingly high level of demand from investors seek to maximise the fee-adjusted performance of their capital by leveraging active-type strategies at lower costs.
By Jonathan Chambers — Analyst Consultant, GreySpark Partners
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