How Misunderstanding Factor Models Set Unreasonable Expectations for Smart Beta.

The poor performance of some smart beta strategies in recent years should not be surprising. After all, the standard factor pricing models from which the strategies draw their well-known factors inevitably include factors that may fall out of favor, sometimes for extended periods, as market conditions change. Some smart beta providers are exploring factor timing and multifactor portfolios in an effort to provide more consistent return premiums and assuage investor disappointment. Despite this move away from largely passive management and toward more active management, smart beta strategies remain subject to limitations imposed by the standard factor models underpinning them, including a relatively narrow focus on a handful of generic factors and a failure to take into account correlations between factors. Overcoming these limitations requires further steps toward a fully active, dynamic, multifactor approach (aka "smart alpha"). [ABSTRACT FROM AUTHOR]