Is Smart Beta Just Monkey Business? An Analysis Of Factor Exposures, Upside-Down Strategies And Rebalancing Effects

“Monkey portfolio” proponents argue that all smart beta strategies generate positive value and small-cap exposure, which fully explains their outperformance. They also claim that similar results are obtained by any random portfolio strategy, including the inverse of such strategies. We analyse these claims using test portfolios which follow commonly-employed methodologies for explicit factor-tilted indices. Our results directly invalidate all of these claims.