AgPa #39: Low-Risk Investing – Fact and Fiction
Fact and Fiction about Low-Risk Investing (2020)
Ron Alquist, Andrea Frazzini, Antti Ilmanen, Lasse Heje Pedersen
The Journal of Portfolio Management Multi-Asset Special Issue 2020, 46 (6) 72-92, URL/AQR
After examining value and momentum, this week’s AGNOSTIC Paper examines some Fact and Fictions around defensive / low-risk investing. The defensive / low-risk factor captures various well-known effects like the low-volatility and Betting Against Beta effect, but also fundamental strategies like quality (a.k.a. the Quality Minus Junk factor).
- Fact: Low-risk securities generate risk-adjusted outperformance
- Fiction: The low-risk premium is weaker than other factors
- Fact: Low-risk strategies worked out-of-sample
- Fiction: Low-risk profits come from industry bets
- Fact: Low-risk investing worked across geographies and asset classes
- Fiction: Low-risk investing doesn’t work because the CAPM is dead
- Fact: There is economic theory behind the low-risk premium
- Fiction: Low-risk investing does not survive trading costs
- Fact: Low-risk investing can lose money in bear markets
- Fiction: Low-risk factors became too expensive