Impact to the market fluctuations from Smart Beta Investing through Fundamental Investing

Abstract

Smart beta investments have recently enjoyed popularity among Japan market investors, leading to a substantial increase of Minimum Variance strategies in the form of ETF products. While each investment product, whether smart beta or traditional active fund, is designed to fulfill its investor expectations, many wonder whether there are any market effects from the trading of smart beta strategies on the more traditional strategies. I discuss if it is possible to find the background of phenomena and if there are methods to avoid the impact from smart beta strategies. I try to construct an optimal portfolio that seeks alpha by estimating a robust factor model and conduct a simulation that employs advanced techniques, including the use of residual variance scalars to correct for the Simultaneous Estimation Bias problem.