The second edition of the MJ Hudson Systematic Factor Market Review estimates that there are now US$ 1trillion of assets invested in systematic factor strategies. It is estimated that strategies created by investment banks represent approximately US$300bn of that amount, with the balance invested in strategies managed by asset managers.
The 2017 survey involved in-person meetings, supported by an online questionnaire. 21 asset managers and 11 investment banks participated. These participants alone currently offer approximately 2,200 systematic factor strategies to the market.
Key findings in the report:
- Market estimated to have breached the US$ 1 trillion barrier, invested in more than 2,200 strategies
- Participants in the survey, alone, run a total of 2,213 strategies, with 700 of these having assets in excess of US$ 100m
- Most strategies are “smart beta” (long only strategies) but the number of “alternative beta” (long-short strategies) is increasing
- 385 of the 615 strategies offered by asset managers are equity based, along with 507 of the 1,598 investment bank strategies, but multi-asset strategies have been a key feature of new product development
- The offerings of asset managers and investment banks differ from each other, in that banks typically offer a wide range of strategies as portfolio building blocks, whereas asset managers tend to concentrate in a smaller number of flagship strategies
- Investors are often attracted to systematic factor strategies by the lower fees charged
- Average management fees for smart beta are 0.47% at asset managers; investment banks charge average fees of 0.51%
- Management fees are higher for long/short alternative beta strategies, on average, with asset managers charging 0.77% and investment banks charging 0.65%
- Whilst transparency on fees is improving, a wide variety of charging structures are still employed by the banks in particular, highlighting the need for close scrutiny beyond headline rates when comparing strategies
- Institutional investors, led by pension funds, have been the key source of assets for the industry
- Future growth is expected to come from multi-strategy products in particular
- The respondents report investor concerns over possible crowding of the strategies, as well as wide dispersion of strategy performance as possible impediments to further growth
- Despite the recent growth, the industry still lacks a common, coherent terminology as well as recognised performance benchmarks
Odi Lahav, CEO of MJ Hudson's Investment Advisory Team explained:
“We are very pleased to publish this update on our 2014 research, which was the first to include information on systematic factor strategies offered by investment banks. Despite the market doubling to US$ 1Trillion since then, we believe that institutional investors looking to access smart beta and alternative beta products are generally not well supported by the investment advisory community.
Our goal is to provide market-leading research and advisory solutions to institutional clients, such as pension funds, insurance companies, sovereign wealth funds and other institutional investors.”
Antti Suhonen, one of the authors of the report and a Director at MJ Hudson added:
“Our 2017 Market Review provides a comprehensive overview of the factor strategy market, reflecting our commitment to this area and our coverage of the product universe. Our coverage is across all asset classes (rather than just equities and fixed income) and includes “alternative beta” (long-short) strategies as well as the rather better understood long-only “smart beta” products. We believe we are also unique in the depth of our coverage and understanding of the strategies offered by investment banks, which make up a considerable portion of the market.”
The MJ Hudson Systematic Factor Market Review – A survey of smart and alternative beta strategies for institutional investors explains the development of these strategies over time, positing the reasons for their growth in popularity and providing detailed estimates of the size and scope of today’s market. It also covers fees, investment terms and governance, as well as listing some of the factors that product providers believe could inhibit the future growth of this area.
“Given the increasingly complex and diverse nature of the marketplace and the fact that live track records in this sector are very limited, it is important that expert advice is taken by any investors looking to access these strategies. Whilst the promise of lower fees and strong returns may appeal, selecting the right strategies-and the right providers-for an investor’s specific requirements is no easy feat.”
Further information on MJ Hudson’s systematic factor and asset allocation advisory services can be found here.