‘Smart Beta’ (long only) and ‘Alternative Beta’ (equity market neutral) strategies both provide investors with solutions that diverge from straightforward long exposure to equity indices, the so-called ‘equity risk premium’. Because they share a common terminology, a systematic implementation framework, and a reliance on similar well documented effects – e.g., Momentum, Value, Quality, Low Volatility, Small-Cap vs Large-Cap – the two are seen as similar. However, in spite of the obvious commonalities, the two actually differ in many respects, specifically in their construction process, the actual exposures they provide, and where they fit in a portfolio.
This note attempts to offer some clarity. While we focus on equities here, the same logic can be (and occasionally is) applied to other asset classes.