What Makes Alternative Beta Smart?

Research Affiliates

Chris Brightman

Research

8 Pages

Research Affiliates examines what truly makes alternative beta strategies “smart,” arguing that simplicity, transparent implementation, and efficient portfolio construction matter more than marketing labels. The paper contends many strategies owe their excess returns to rebalancing effects rather than unique investment insights, while unnecessary turnover and complexity can erode results.

Key Takeaways

Rebalancing Drives Returns: Simulated monkey portfolios generated 1.6% annual value added, suggesting systematic rebalancing, not sophisticated stock selection, explains much of alternative beta's historical outperformance.
Risk Matters Too: A fundamentals weighted strategy delivered 1.93% annual value added with 15.5% volatility versus 18.3% for the monkey portfolio and 15.3% for the cap weighted market.
Lower Turnover Wins: The RAFI strategy averaged only 11.5% annual turnover versus 97.5% for the monkey portfolio, helping reduce implementation costs while preserving return potential.
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