Equity factor indices
Existing factor indices exhibit a broad range of deficits. Based on our experience in factor investing Alpha Centauri was able to address and resolve most of these problems. In detail, these issues are:
Quality of data
Most index vendors use conventional company datasets to calibrate their indices. One of the problems resulting from the use of this kind of data is, that they are not point in time, which means that the data were not known at the time of index calculation yet. Lagging does not solve the problem, because as with macroecomomic datasets most of these data are prone to hefty revisions.
Alpha Centauri uses point-in-time data series.
Rebalancing frequency
The majority of factor indices are rebalanced every six month. This frequency is far too low for successful factor investing / extraction, because the market reprices factor loadings in relatively short time frames. At the end, investors are holding “return free risk”, because return is priced out of the stock basket, while tracking risk remains.
Alpha Centauri rebalances in shorter spans.
Systematic Risk
Current concepts exhibit disproportionate systematic risk, mainly induced via country-, currency- and sector risk as well as exposure to other unwanted factors. High tracking error with respect to main indices is a byproduct.
Alpha Centauri uses FIS' investment Risk solution (APT) for index construction – a system awarded several times for its outstanding quality.
Number of stocks
A few number of factor indices contain a small number of stock and lack diversification while a lot of indices are "diworsified", to use Charlie Munger's phrase, that is too many constituents. This leads to higher replication costs.
Alpha Centauri indices ensure proper diversification while containing systematic risk beyond target factor load.
Weighting scheme
Existing concepts use weighting schemes according to the main indices. The pitfall of this approach is that market capitalization is the main driver of weight and factor load is misrepresented. A small stock with high factor exposure exhibits small weight on average.
Alpha Centauri uses factor load as a main driver while containing risk exposures (small cap for example) through risk management techniques.
Common factor attributes
- understandable
- widely established
- sustainable
- accessible
- attractive
Capture Risk Premia
Eurex video explaining iSTOXX Europe Factor futures
