Low-volatility investing: Standing out from the crowd

Despite crowding concerns, low-volatility investing should remain relevant in future market environments

Apr 9, 2018 | Michael Fraikin and Dr. Henning Stein

Low-volatility strategies have grown notably popular in recent years, assuming many of the qualities of an investment bandwagon and prompting fears of a crowded trade. We argue that these fears remain unfulfilled and, perhaps more importantly, that even their realisation should not diminish the appeal of products that adopt a truly distinctive approach.

In explaining why we believe this is the case, we aim to demonstrate the appeal of strategies that acknowledge the continued value of looking beyond the herd. We argue that such strategies should take the best elements of the methodologies now commonplace in the sector – foremost among them the use of factors to exploit the low-volatility anomaly – and combine them with a process that also draws on experience, expertise and insight.

The ultimate goal of such an approach should be to recognise the blurring of the lines between passive and active management and to span them as effectively as possible. In short, we suggest that what investors in this sphere increasingly want is a rigorous, proactive investment ethos that genuinely strives to deliver both low volatility and high alpha.

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