Low volatility investing revisited synonyms

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The stocks in question tend to involve high uncertainty, low dividends, a need for fresh capital and low profitability. In addition to being short exuberance, low volatility strategies are also short junk Therefore, in addition to being short exuberance, low volatility strategies are also short junk.

These features help explain the major drawdowns of low volatility strategies, but also highlight the main risk that investors need to accept in order to harvest the low volatility premium in the long run. Alpha volatility can momentarily cause aberrations Many investors count on low volatility strategies to provide them with capital preservation during severe market downturns.

But during the Covidinduced market crash in the first quarter of , the downside protection they offered mostly fell short of expectations. However, the alpha does not come in a smooth, steady return stream, but involves a considerable amount of uncertainty. The black diagonal line reflects the benchmark return and the grey line represents the expected return of a portfolio with a beta of 0.

The blue dots denote positive alphas, the orange dots negative alphas but with some downside protection, and the purple dots negative alphas with no downside protection. Figure 1 Simulated illustration of the impact of alpha volatility on Low Volatility performance Source: Robeco Quantitative Research Although low volatility strategies typically provide the expected protection during market downturns, there is always a non-negligible probability that they do not.

The important thing, however, is that this does not invalidate low volatility investing, especially over the long run. This tail risk is inherently present in low volatility strategies. Figure 1 also helps to explain another counterintuitive result, specifically that low volatility strategies can outperform when the market delivers double-digit positive returns. Therefore, low volatility strategies cannot only surprise negatively, by underperforming in a down market, they can also surprise positively, by outperforming in an up market.

Individual investors appear to be attracted to risky stocks for different reasons, most notably their resemblance to lottery tickets. For example, recent research examines the performance and trading behavior of investors using the commission-free Robinhood trading app. This is clearly the kind of individual investor behavior that is related to the low volatility anomaly. Exchange-traded funds ETFs is another innovation that has been massively embraced by individual investors.

One study examines specialized ETFs that track niche portfolios and charge high fees. The researchers find that these products hold stocks with characteristics that are appealing to retail and sentiment-driven investors, such as high recent performance, media exposure and sentiment.

At Robeco, we recently examined the low volatility effect in the local Chinese stock market, which offers a rare opportunity for what we believe to be a true independent out-of-sample test. Some studies go back 90 years and show that low-volatility stocks beat high-volatility stocks over the very long run see image.

Since low-volatility securities tend to lag during bull markets and tend to reduce losses in bear markets, a full business cycle is needed to assess performance. Over a shorter time period like one year, Jensen's alpha is useful to calculate performance.

This performance metric corrects the performance of for market beta risk. For example, when a low-volatility strategy has a beta of 0. Lower risk should give lower return. Criticism[ edit ] Any investment strategy might become ineffective over time if its popularity causes its advantage to be arbitraged away.

Revisited synonyms volatility investing low how to earn more bitcoin

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