Eric Falkenstein | Jun 10, 2013 01:18AM ET
Low volatility had a bad month in May, and there has been a slew of commentary on this - see Abnormal Returns for a bunch of links.
Deutsche Bank's 'The Quant View' by Rochester Cahan summarized the month's performance by noting that "Last month we argued that the Low Volatility/High Dividend Yield trade was looking crowded, and cautioned that this could indicate elevated downside risk. It turns out that call was prescient."
"Could" and "change in probability" means nothing, because it's consistent with anything, eg, if the rate rises it's hardly testable because the old and new probability are couched merely as possibilities, and if the probability doesn't change, that's in the forecast too ('could'). Now if they said, don't buy or short strategy X this month, that would have been prescient. I wonder if such people realize how disingenuous this is, or if they think their nuance is actually highly rigorous analysis.
In any case, last month was very bad for low volatility strategies, leading many researchers to reassess the validity of this approach. But, to put it in perspective, here's the total return over the past 12 months, using my beta data.
Now, many people seem to infer from this that low vol/beta has been a bad bet over the past year. If you evaluate yourself purely against the indices, this is true: deviations from the benchmark are only good if they are above the benchmark. Yet, in simple Sharpe ratio or Information ratio, high beta portfolio did poorly, even in this period. The clear winner is actually a Beta-1.0 portfolio, which has the highest Sharpe and Information ratio. Like low volatility, I have championed the beta 1.0 portfolio for a while, and I'm sure it will be a big fund someday.
Stats on US portfolios, 5/31/12-5/31/13
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