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Article

Benchmarking Low-Volatility Strategies

David Blitz and Pim van Vliet
The Journal of Index Investing Summer 2011, 2 (1) 44-49; DOI: https://doi.org/10.3905/jii.2011.2.1.044
David Blitz
is the head of Quantitative Equity Research for Robeco Asset Management in the Netherlands.
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  • For correspondence: d.c.blitz@robeco.com
Pim van Vliet
is a portfolio manager of low-volatility equities at Robeco Asset Management in the Netherlands.
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  • For correspondence: p.van.vliet@robeco.com
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Abstract

In this article, Blitz and van Vliet discuss the benchmarking of low-volatility investment strategies, which are designed to benefit from the empirical result that low-risk stocks tend to earn high risk-adjusted returns. Although the minimum-variance portfolio of Markowitz is the ultimate low-volatility portfolio, the authors argue that it is not a suitable benchmark, as it can only be determined with hindsight. This problem is overcome by investable minimum- variance strategies, but because various approaches are equally effective at minimizing volatility, it is ambiguous to elevate the status of any one particular approach to benchmark. As an example, the authors discuss the recently introduced MSCI Minimum Volatility indices and conclude that these essentially resemble active low-volatility investment strategies themselves, rather than a natural benchmark for such strategies. In order to avoid these issues, they recommend to simply benchmark low-volatility managers against the capitalization-weighted market portfolio, using risk-adjusted performance metrics such as the Sharpe ratio or Jensen’s alpha.

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The Journal of Index Investing: 2 (1)
The Journal of Index Investing
Vol. 2, Issue 1
Summer 2011
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Benchmarking Low-Volatility Strategies
David Blitz, Pim van Vliet
The Journal of Index Investing May 2011, 2 (1) 44-49; DOI: 10.3905/jii.2011.2.1.044

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Benchmarking Low-Volatility Strategies
David Blitz, Pim van Vliet
The Journal of Index Investing May 2011, 2 (1) 44-49; DOI: 10.3905/jii.2011.2.1.044
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  • Article
    • Abstract
    • A UNIQUE LOW-VOLATILITY BENCHMARK DOES NOT EXIST
    • AN EXAMPLE: THE MSCI MINIMUM-VOLATILITY INDEX SERIES
    • BENCHMARKING AGAINST THE CAPITALIZATION-WEIGHTED INDEX
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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