Investors find smoother path with smart beta

Financial markets may not always be predictable. But, in the face of evolving volatility, today’s investors are demanding a smarter approach to strategic asset allocation, discovers Blake Evans-Pritchard

After a strong start in 2024, the global rally in equity markets tapered off and investors were treated to an unwelcome spate of volatility. This has refocused investors’ minds on strategic asset allocation and helped fuel demand for smart beta optimisation solutions.

The smart beta approach is a type of quantitative investment strategy (QIS), which, through careful selection of assets, can provide an effective way of navigating choppy waters that more traditional approaches might struggle with. These smart beta strategies can be applied to a wide range of asset classes, including equities, fixed income and commodities, and combined in multi-asset investments.

The wildest market swings last year were seen in early August, when the Cboe Volatility Index (VIX) jumped by a dramatic 180% – its biggest-ever one-day spike. This put the VIX at levels not seen since the height of the Covid-19 pandemic.

Such capriciousness has not abated. Overzealous valuations of US technology stocks have helped stoke the fire further, with sharp declines towards the end of last year resulting in significant losses. Amid this uncertainty, portfolio managers continue to hunt for new ways to get the best out of the volatile environment.

Natalia Naber, UBS

“We have been spending a lot of time over the past six months looking at how we can offer a broader spectrum of investors more than the typical vanilla payoffs they may be used to,” says Natalia Naber, global head of intermediaries dynamic strategies sales, UBS.

“By bringing together composite assets and strategic asset allocation, we have been able to incorporate sophisticated volatility control features within our products that are well suited to current market conditions.”

As one of the largest wealth management companies in the world, UBS’s smart beta product suite is truly global. Smart beta investment strategies have found particular success in Asia, where the appeal of these products has been growing steadily for the better part of a decade, says Naber.

Many Asian investors are keen to tilt their portfolios towards US markets, but they remain worried about the rising levels of risk. They also tend to provide shorter-dated time horizons than their counterparts in either the US or Europe.

“We have been spending a lot of time with Asian clients, looking at the most appropriate products to meet their investment needs going into 2025,” says Naber. “Smart beta has stood out as a core driver of our wealth management business in the region.”

Yield-hungry, risk-wary

One of the chief challenges in dealing with market volatility is that, as assets sell off, the realised volatility of underlying indexes immediately shoots up, forcing the implied volatility embedded in options markets to be repriced at higher levels. This makes hedging strategies more expensive and weakens the potential for investment returns. Volatility control mechanisms are a way of preprogramming indexes, ensuring realised volatility is kept at low levels even as implied volatility ticks upwards.

Last year, UBS launched a volatility control equities product in partnership with Robert Engle, a professor at New York University who won the Nobel Prize in Economics in 2003 for his statistical modelling work on short-dated volatility prediction. He shared the prize with British econometrician Clive Granger.

“Looking at the flows coming into UBS Wealth Management, we see that a lot of people want to allocate to US equities, but they are worried about current risk levels. So we took the methodology developed by Professor Engle more than 20 years ago and incorporated it into our smart beta products,” says Naber.

UBS’s volatility control product uses a range of forward-looking indicators derived from Engle’s work to rebalance intraday, rather than waiting until close of business to adjust the calibration. By doing this over such a short time horizon, UBS is able to monetise some of the volatility and offer more attractive risk/return payoffs for clients.

The product is also embedded with a capital return feature, providing “a conservative way for investors to express long views on equities”, says Naber.

UBS has so far focused this particular smart beta strategy on indexes that are owned and managed by S&P Global, such as the S&P 500. The investment house is currently working to embed Nasdaq indexes into the product as well. This solution should launch within the next few months, says Naber.

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“Potentially, we could extend the solution beyond these two indexes as well,” she adds. “We are looking at how we can scale this product across a range of liquid indexes that are suitable for intraday high-frequency trading.”

Another UBS solution proving popular is a commodities smart beta product, which offers investors exposure to physical gold along with a regular income stream. The product uses derivative overlays to monetise the volatility embedded in the asset class.

Gold has rallied significantly over the past few months, achieving near-record highs on the back of a weak US dollar. The price of the commodity stood at $2,492 per ounce at the start of September 2024, rising to a high of $3,433.55 on April 22, 2025, according to the World Gold Council. This is on top of the steady rise that gold has seen since 2015.

“There has always been a cluster of investors that like gold, but we are seeing a lot more clients who have never touched the asset class before asking us what kind of gold investment products we have on our shelf,” says Naber. “These people want to participate in the gold rally. This makes a lot of economic sense and aligns with our investment outlook.” 

The ‘smart’ component comes from embedding out-of-the-money put and call options in the product to take advantage of volatile market conditions. Such ‘strangle’ positions – which incorporate a call option above the current market price and put option below it – are recalculated daily using a specific price point in the future.

“The underlying gold index was designed some years ago, and we have been offering it to highly sophisticated hedge fund clients since then,” says Naber. “What we are now seeing is demand from the retail side, so we are bringing this product to a broader audience.”

These are just two examples of the kinds of smart beta products finding favour with investors in Asia. There are plenty of others and, with volatility showing no sign of letting up, wealth management firms are exploring what other innovations might be worth exploring.

Third-party partnerships

The overwhelming majority of smart beta QIS products that UBS offers are systematic rules-based strategies. However, between 5% and 10% of these strategies are used to develop what Naber refers to as “actively diminished indexes”.

Lin Qian, UBS

These actively managed products are especially popular in Europe and Asia, but are yet to take off in the US. These solutions incorporate an element of active management into the index construction and are generally developed in partnership with third parties, fusing UBS’s smart beta expertise with tried-and-tested asset allocation strategies.

“There are a few asset managers with whom we have collaborated on either double-branded indexes or asset manager-branded products that are underpinned by our unique index experience,” says Lin Qian, Asia-Pacific (Apac) head of QIS structuring.

Another example of the close collaboration between UBS and a third party is the fixed-index endowment (FIE) product that Prudential launched in Singapore last year.

Index-linked products such as fixed-index annuities have been popular in the US for many years, with Christine Wang, co-head of global market distribution, Apac at UBS, stating they are now one of the top drivers of UBS’s distribution business. Insurers in Japan have also displayed a healthy appetite. While they have been less prominent in the rest of Apac, this may slowly be starting to change.

Christine Wang, UBS

“We’re bringing this type of product to Singapore on a nascent scale, and hoping this business will start to open up in Hong Kong, pending some regulatory changes,” says Wang.

PRUAssure, as the new FIE product launched in Singapore has been branded, is a nine-year policy linked to UBS’s Multi Asset Strategy Tactical Rotation Index. The index invests globally across equities, bonds and commodities.

Equities are used to capture growth opportunities, adapting to market conditions through early reading of key US economic indicators. Regional equity exposure can be adjusted up and down intraday to maintain a 5% volatility. An embedded intraday momentum feature responds to sharp selloffs, decreasing exposure in periods of negative market conditions.

Bonds serve as a defensive asset. A factor-based approach is used to shift allocations across three core markets as conditions change, with ‘trade’, ‘carry’ and ‘value’ indicators monitored daily for each region.

The commodity component aims to extract stable returns from a futures carry. This implies that the cost of storing, insuring and paying interest on a given quantity of a commodity will be fully accounted for in later months rather than at the outset.

The overall strategy also incorporates a 6% volatility target to control risk.

“This index systematically tilts risk exposure depending on whether the investor is in a growth environment, a stable market environment or a contracting market environment. This is a sophisticated tactical asset allocation product in which the client has access to a UBS-designed strategy through an insurance policy,” says Qian.

“As the dealer of the product, we are a bit more behind the scenes, but this distribution model allows us to tap into another client segment that we wouldn’t normally consider – those clients that want to purchase insurance products or savings products with insurance features.”

Naber expects that similar smart beta distribution agreements will help drive growth in UBS’s QIS business this year.

Broad appeal

Smart beta strategies are nothing new. They were introduced a decade ago as a way for hedge funds to generate extra yield by tapping into alternative risk premia. The appeal of such strategies is now broadening, and UBS is sensing greater opportunities to access other segments of the market.

“Broadly speaking, QIS is used for three different purposes,” says Wang. “Institutional clients use QIS for their hedging needs. Others rely on QIS to capture alternative risk premia and, increasingly, QIS is making its way in structured products that we offer to professional investors through our wealth management business.”

It is this third segment of clients that UBS has been focusing on and will continue to do so as 2025 unfurls.

“This is why we are simplifying the products that we offer and really leaning into the distribution business,” says Naber. “Smart beta is a great way of keeping products simple, focused and versatile.”

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