Should investors fear a 'smart beta crash'?

Reports highlight potential dangers of appraoch

Smart beta strategies have come under increasing scrutiny lately, amid burgeoning demand for these products, with EDHEC Risk Institute and Research Affiliates recently publishing reports warning on the potential dangers inherent in factor investing.

These strategies allow investors to gain exposure to various risk factors, such as value, momentum and size, but both studies have highlighted the limitations of the vehicles. Inflows into smart beta funds have soared since the financial crisis, with AUM reaching $616bn in 2015 from $103bn in 2008, according to Morningstar. However, investors could be wrong-footed as they entrust such huge amounts of money to these still poorly understood strategies. In a report entitled How can "smart beta" strategies go horribly wrong?, Research Affiliates has highlighted the danger of "performan...