A white paper on smart-beta investing released this week by “veteran quant” Eric Shirbini of ERI Scientific Beta says that “second-order risks and exposures aren’t being sufficiently accounted for by investors or disclosed by providers.” This according to a recent article in Institutional Investor.

“Just like monitoring the style drift of active managers,” writes Shirbini, “investors need to monitor the risk dynamics of factor strategies.” Specifically, Shirbini cites three categories of risk to be monitored: market beta, macroeconomic and sector/geographical. If not managed, he argues that a smart-beta strategy could lose out on the long-term equity market risk premium.

Shirbini notes that “index providers are not always transparent about the implicit unrewarded bets to which their offerings are exposed.” He cites the example of the volatility factor, arguing that investors should “pay less attention to recent track records and price than most do….and more mind to tilts not named in the product title.”