Fact and Fiction about Low-Risk Investing

26 Pages Posted: 25 Mar 2020

See all articles by Ron Alquist

Ron Alquist

Office of Financial Research

Andrea Frazzini

AQR Capital Management, LLC

Antti Ilmanen

AQR Capital Management

Lasse Heje Pedersen

AQR Capital Management, LLC; Copenhagen Business School - Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Date Written: February 17, 2020

Abstract

Low-risk investing within equities and other asset classes has received a lot of attention over the past decade. An intensive academic debate has spurred, and been spurred by, the growing market for low-risk strategies. This article presents five fact and dispels five fictions about low-risk investing. The facts are: Low-risk returns have been 1) strong historically, 2) highly significant out-of-sample, 3) robust across many countries and asset classes, and 4) backed by strong economic theory, but, nevertheless, 5) can be negative when the market is down. The fictions that this article dispels are that low-risk investing 1) delivers weaker returns than other common factor premia, 2) is mostly about betting on bond-like industries, 3) is especially sensitive to transaction costs and only works among small-cap stocks, and 4) have become so expensive that they cannot do well going forward. Lastly, the article dispels the fiction 5) that CAPM is dead and so is low-risk investing – this statement is a contradiction; If the CAPM is dead, then low-risk investing is alive.

Keywords: Low-risk investing, betting against beta, capital asset pricing model, factor premiums

JEL Classification: G10, G11, G12, G14, G23, G40

Suggested Citation

Alquist, Ron and Frazzini, Andrea and Ilmanen, Antti S. and Pedersen, Lasse Heje, Fact and Fiction about Low-Risk Investing (February 17, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3539452 or http://dx.doi.org/10.2139/ssrn.3539452

Ron Alquist

Office of Financial Research ( email )

717 14th Street, NW
Washington, DC 20220
United States

Andrea Frazzini

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203-742-3894 (Phone)
203-742-3394 (Fax)

HOME PAGE: http://www.econ.yale.edu/~af227/

Antti S. Ilmanen

AQR Capital Management ( email )

United Kingdom
+447887475184 (Phone)

Lasse Heje Pedersen (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

New York University (NYU) ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
1,308
Abstract Views
4,332
rank
16,520
PlumX Metrics