ERI Scientific Beta has launched a long/short equity market neutral index that takes a long position in a number of portfolios designed to maximise exposure to different factors while shorting the broad cap-weighted market. The succinctly named Scientific Beta Developed Multi-Beta Multi-Strategy Managed Volatility L/S Equity Market Neutral Index (x3.5) includes large- and mid-cap equities from global developed markets.

The index gives pure-play exposure to the value, momentum, low volatility, high profitability and low investment factors.

The index implements its long/short strategy through a short position in the cap-weighted reference index and a quarterly allocation to sub-portfolios in the long leg with the objective of minimising the volatility of the long/short spread under the constraint of factor exposure positivity, diversification across factor indices and market beta neutrality. The long leg sub-portfolios are designed to efficiently capture the long-run factor risk premia that have been documented as being associated with factor tilts (value, momentum, low volatility, high profitability, and low investment).

The allocation across smart factor indices is implemented with the goal of minimising the volatility of the long/short spread. Return amplification is obtained by the use of 3.5x leverage, maintaining volatility below 8%.

Noel Amenc, CEO of ERI Scientific Beta, commented: “Scientific Beta’s long/short offering corresponds to its investment philosophy: risk management, factor diversification and top-down implementation. The portfolio construction methodology prioritises risk management, which guarantees the robustness of out-of-sample performance.

“It diversifies across multiple factors to benefit from low correlations across factors rather than concentration in factor champions, which lack consistency and are a source of unstable performance and high turnover. The long/short solution is implemented in a top-down manner to allow dynamic allocation across factors, guarantee transparency and facilitate the search for market beta neutrality.”

Long/short factor portfolios are nothing new and were in fact how factors were first identified and researched in academic literature. Some commentators argue that a long/short factor strategy gives diversification benefits that long-only smart beta strategies cannot. There are a number of long/short factor ETFs listed in the US, although these are typically actively managed rather than rules-based. So far they have struggled to arouse much interest from investors; however, as the smart beta ETF landscape becomes ever more crowded, issuers could increasingly look to more complex products to fill gaps in the market.