Are Hedge Funds on the Other Side of the Low-Volatility Trade?

20 Pages Posted: 13 Jan 2017 Last revised: 27 May 2017

See all articles by David Blitz

David Blitz

Robeco Asset Management - Quantitative Strategies

Date Written: January 12, 2017

Abstract

The low-volatility anomaly is often attributed to limits to arbitrage, such as leverage, short-selling and benchmark constraints. One would therefore expect hedge funds, which are typically not hindered by these constraints, to be the smart money that is able to benefit from the anomaly. This paper finds that the return difference between low- and high-volatility stocks is indeed a highly significant explanatory factor for aggregate hedge fund returns, but with the opposite sign, i.e. hedge funds tend to bet not on, but against the low-volatility anomaly. This finding suggests that limits to arbitrage are not the key driver of the low-volatility anomaly and that concerns about low-volatility having become an ‘overcrowded’ trade may be exaggerated. Another contribution of this study is that it identifies a new, highly significant explanatory factor for hedge fund returns.

Keywords: Low-Volatility Anomaly, Low-Beta Anomaly, Betting against Beta, Limits to Arbitrage, Hedge Funds, Factor Investing

JEL Classification: G11, G12, G14

Suggested Citation

Blitz, David, Are Hedge Funds on the Other Side of the Low-Volatility Trade? (January 12, 2017). Available at SSRN: https://ssrn.com/abstract=2898034 or http://dx.doi.org/10.2139/ssrn.2898034

David Blitz (Contact Author)

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

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