ERI Scientific Beta: Providers fail to disclose key risks to smart-beta investors

Three hidden risks can hit performance

Several failings in terms of risk disclosure on smart-beta products have been flagged in a recent report by ERI Scientific Beta.

The report, entitled Misconceptions and mis-selling in smart beta: Improving the risk conversation in the smart beta space, said a number of index providers failed to highlight the risks associated with smart-beta strategies to investors. Most notably, the white paper stressed it was important firms avoided the misrepresentation of back-tested results, as they had been "heavily" influenced by conditions not necessarily related to the product. It gave the example of low volatility and defensive strategies where performance in recent years had been driven by falling interest rates. I...