Institutions Have Appetite for Smart Beta Hedge Funds

A survey conducted by Citi Prime Finance revealed that an overwhelming majority of institutional investors are planning to increase their allocations to risk premia and/or smart beta investments over the next three years. Citi’s survey included investors and intermediaries, mostly institutional, representing nearly $1 trillion of combined assets under management (“AUM”). Its findings were published on May 12, 2016.

Risk Premia/Smart Beta Defined

Risk premia and smart beta strategies identify factor-based “themes” such as value, momentum, or growth, which are considered key characteristics driving the behavior, performance, and volatility of securities beyond traditional sector or geographical exposure. Advocates of the strategies reason that allocations based on factors are likely to outperform market cap-based allocations on a risk-adjusted basis.

Growing Interest

Eighty-one percent of Citi’s survey respondents said they were already investing in, or planning to invest in, risk premia and/or smart beta. Of those respondents, 86% said they planned to increase those exposures over the next three years, while 14% said they planned to maintain them. This means that zero respondents said they planned to reduce their allocations or cut them altogether.

The image below shows the number of smart-beta ETF launches each year:

Smart Beta ETF Launches By Year

Hedge Fund Popularity

Hedge funds are still the most popular vehicle for accessing risk premia and smart beta strategies, with 69% of respondents favoring them over investment bank products (15%), in-house allocation (8%), and ETFs (8%). Fifty-three percent of respondents said they planned to increase their allocations to hedge funds over the next three years.


The conversion of a traditional portfolio into a factor-based, risk-adjusted portfolio can be a complex process that may require the dynamic collection of factor data. This, in Citi’s view, means that fund managers are going to need to use strategic partners. According to Christian Raute, Global Head of Citi’s Central Risk Desk Strategy: “These strategies require sophisticated technology and trading solutions in order to be fully effective.”

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