Whitepaper - October 2018

Smart Beta: Even Smarter with an Optimizer and a Custom Risk Model

Axioma and CS HOLT have collaborated to create a smart beta index — the Credit Suisse HOLT © Global Multi-Factor Portfolio — that united the stock selection prowess of CS HOLT with Axioma’s portfolio construction and risk model expertise. In this paper, we highlight three key principles that drove the process to create this portfolio:

  1. Using an optimizer for portfolio construction leads to a portfolio that avoids unintended and uncompensated bets and generates a higher information ratio.
  2. By using a custom risk model the process can better assess the trade-off between risk and return of “systematic portfolio bets”, thereby better capturing ex-ante risk targets and producing a higher information ratio than using a standard model.
  3. The combination of optimization and a custom risk model leads to more intuitive, and therefore useful, ex-post attribution of the portfolio, where the active return of the portfolio is primarily explained by all the components of the alpha signal.

Authors

Melissa Brown

Managing Director of Applied Research