Exotic beta might seem like a contradiction in terms.
But more investors are looking at passive ways to gain exposures to niche segments of the markets, and indexing managers are responding.
Some of the largest managers of indexed assets are developing non-traditional equity indexing strategies that provide investors exposure to parts of the market that could be capital constrained or otherwise hard to access.
Generally speaking, the interest in niche beta stems from investors' need to diversify their portfolio into non-correlated assets, said Alain Cubeles, senior investment strategist at Northern Trust Global Investments, Chicago.
But since the credit crunch and the downturn in the equity markets, investors are taking a closer look at how to diversify risk, he said.
The $15.5 billion Kentucky Retirement Systems, Frankfort, and the $8 billion Orange County Employees Retirement System, Santa Ana, Calif., are among the pension funds that have turned to non-traditional passive investments.
But some consultants question whether indexing is the right way to access inefficient markets that provide skilled managers with opportunities to garner strong returns.
“If our clients go non-traditional, it's not through indexing,” said Steven Charlton, director of consulting services at NEPC LLC, Cambridge, Mass.
Northern Trust is developing a passive strategy that will provide exposure to frontier markets. Mellon Capital Management, San Francisco, is about to launch a strategy that provides exposure to a group of non-traditional indexes such as those that track commodities and inflation linked bonds.
Meanwhile, State Street Global Advisors, Boston, is ready to launch a minimum-variance passive strategy that weights securities based on how risky they are relative to the rest of the market.