ActiveBeta Indexes: Capturing Systematic Sources of Active Equity Returns
What is the nature of active equity management returns? Do active equity managers truly add value? Do they have idiosyncratic skill or are they providing only beta-like systematic sources of active return? In this groundbreaking book, the authors provide new answers to some of the oldest questions about investing.What if, they suggest, a significant portion of active management returns were driven by systematic sources of active equity returns? And what if these systematic active return sources could be captured more efficiently, transparently, and cost-effectively in a passive index structure? The result would be an innovative framework—ActiveBeta® Indexes.ActiveBeta Indexespresents an investment solution that better defines the investment styles of active managers (i.e., common sources of active returns) and provides an efficient, transparent, and cost-effective passive capture of a significant portion of traditional active management returns. The authors first describe the basis for and evolution of market and style indexes, exploring their development and their limitations. They then detail the theoretical framework and supporting research behind the ActiveBeta Indexes. After introducing the concept of Active Betas, they present their research into the nature and relationships, as well as the pricing and persistence, of the systematic sources of active equity returns. They proceed to illustrate the methodology employed to create the ActiveBeta Indexes and offer a detailed analysis of their performance. The authors then demonstrate the various applications of the ActiveBeta Indexes, including their uses in style investing, performance attribution, portfolio structuring, and asset allocation. They conclude by offering a variety of customizable, alternative solutions for capturing the systematic sources of active equity returns.The investment industry needs to take a critical look at the current state of traditional active management and style investing. The ActiveBeta Framework offers explanations to solve many of the puzzles in the current investment literature and practice. Portfolio managers, asset managers, wealth advisors, pensions and endowments, and other institutional investors seeking to improve returns while reducing costs will find ActiveBeta Indexes a solution to their performance needs in these challenging times.