‘Monkey Portfolio’ Claims Rejected


    ERI Scientific Beta has rejected the claims of ‘monkey portfolio’ proponents who argue not only that all smart beta strategies generate positive value and small cap exposure, which fully explains their outperformance, but also that similar results are obtained by any random portfolio strategy, including the inverse of such strategies. In its research, ‘Smart Beta is not Monkey Business,’ it looks at these claims using test portfolios which follow commonly-employed methodologies for explicit factor-tilted indices. The results directly invalidate all of the above claims. In particular, the results show that many smart beta strategies display exposure to factors other than value or small cap, as well as pronounced differences in factor exposures across different strategies. The ‘monkey’ label comes from the idea that a monkey would be able to generate similar performance through a random selection of stocks.