Leveraging the Low-Volatility Effect

Abstract

Low-volatility has become a mainstream investment style over the past two decades, recognized for delivering high risk-adjusted returns. However, many investors fail to fully capitalize on this strategy due to benchmark constraints. Low-volatility stocks tend to lag during prolonged bull market, a challenge that can be addressed using leverage. This paper outlines five use cases to leverage upon the low-volatility effect, including an enhanced strategy, an alternative to the 60/40 asset allocation, and the use of long and short-extension with stocks and market futures. These approaches help investors aiming to meet objectives ranging from stable performance, consistent outperformance, market-neutral returns, or as an alternative for put options, unlocking the full potential of this underutilized factor.

Keywords: Low-volatility investing, leverage constraints, benchmark constraints, strategic asset allocation, tail risk protection, long-extension, short-extension

JEL Classification: F20, G11, G12, G14