Smart Beta The Institutional Investor's Dilemma

The passive investing revolution isn’t slowing down.  Since the financial crisis, passive fund flows have persistently outpaced active flows.  Moody’s and ICI estimate this trend reaching a cumulative delta of $2trn going back to 2007.  BofA Merril Lynch and EPFR recently published a report back to 2004 showing a delta of nearly $3trn.  This tidal change has fostered much debate over the eventual impact on market structure.

Smart beta can be used for great purposes, but it presents challenges for most institutional investors.  Many investors we surveyed for this paper quipped about the “gold rush” into these instruments without adequate diligence.  After all, it’s a different underwriting process than cutting a check to a GP.  In many ways, it’s an underwriting of the organization’s internal processes that often aren’t setup for this type of scrutiny or execution. 

Whatever approach your institution may have to the smart beta dilemma, this paper will help you better understand how smart beta products can be analyzed & oriented to better compliment your externally run capital.