How Accessible are Risk Premia and Smart Beta Strategies?

Subscribe to our Newsletter

One of the biggest differences between various factor investment strategies is the way they are packaged and positioned in the market.

Smart beta, by nature, is a rules-based and transparent investment technique mainly based on cash instruments or futures. Its relatively simple structure means smart beta products are widely accessible via most, if not all, possible formats – particularly through exchange traded funds (ETFs), which are available to all investors. The number of smart beta ETFs is exploding: ETF management company BlackRock says it expects the worth of smart beta assets to balloon to US$1 trillion from $282bn now as more products enter the market, so investors will be even more spoiled for choice. From institutional investors to individual retail investors, smart beta is more accessible than ever before.

Risk premia products, however, are far less open to retail investors since they are still largely confined to over-the-counter (OTC) markets because of their more complex structures. Risk premia formats include various derivatives, swaps and options, and unlike smart beta which takes a long-only approach, risk premia requires long/short positions to generate returns. As such, trading in risk premia products is still often restricted to large institutions able to trade in swaps (which require a specific setup, including International Swaps and Derivatives Association agreements or ISDAs), or private wealth firms, via certificate formats.

While smart beta in many ways resembles long-only mutual funds which are widely available to investors, risk premia mirrors the more exclusive hedge fund world, which is only accessible to high-end professional investors. But as the market for risk premia develops, its reach is likely to spread.