Tuesday, March 01, 2011

Low Vol Presentation in NYC March 16

Above are the total return charts for low and high beta stocks, where portfolios were created using 100 stocks out of the top 1500 non-ETF US equities. You can see that high beta stocks are outperforming, low beta underperforming, by a couple percent relative to the S&P500.

The latest low vol conference is at some New York financial club on March 16, $50 at the door. That's not close to me, so I won't be going, but looks interesting.

Time: 5:30 PM – 8:30 PM
Venue: Patrick Conway's Pub & Restaurant (downstairs), 40 E 43rd St (between Madison & Vanderbilt), NY, NY – ½-block from Grand Central Station.

Speakers are:
Ruben Falk, Senior Manager, Capital IQ, "Leveraging Minimum Variance to Enhance Portfolio Returns"

Yin Luo, Managing Director and Head of Global Quantitative Strategy, Deutsche Bank Securities, "The Puzzling Relationship between Risk and Return - Defensive and Offensive strategies".

Interestingly, Falk seems to emphasize how to layer this onto a value play (see here). He suggests low volatility investing 'works' (ie, dominates the indices) because of 'leverage restrictions', the Frazzini and Pedersen argument. Lou of DB, meanwhile, highlights "although they have some intriguing properties, low risk is not necessarily one of them". He's one of the coauthors of the white paper I discussed last week, and I think this refers to the fact that his MVP had some bad returns in the last financial crisis. But his white paper had a rather nuanced view of the data I found almost nonsensical, such as when DB wrote "the strategy does not actually position itself so that low-volatility stocks outperform; instead it aligns itself so that lower risk portfolios outperform." I don't think the MVP portfolio, with short positions, is the essence of the anomaly, rather, the simply flat to negative beta/vol relation to returns. As I said, I think they're gilding the lily.


Anonymous said...

So, is the relationship really as simple as low volatility = higher than average risk-adjusted return?

If so, do you think that this relationship will start to disappear as more institutions move into this investment space?

Anonymous said...

Ruben Falk, Senior Manager, Capital IQ, "Leveraging Minimum Variance to Enhance Portfolio Returns"

...And there you go. The seeds to the undoing of the entire strategy. The good thing is when these leveraged, "enhanced" traders periodically get blown out, it should create some nice value for the rest of us.