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Abstract
Low-volatility themed strategies have been among the most popular “smart beta” index products introduced in recent years, and minimum variance in particular has become a widely adopted approach to implementing low-volatility exposure. In the following analysis, we attempt to address the following questions: From a risk perspective, to what extent is the “theoretical” low risk of these strategies driven by illiquidity masquerading as low volatility? Do returns of minimum variance strategies encapsulate some form of liquidity premium in addition to the outperformance of low risk stocks? And, if there is a tendency to tilt towards smaller and less liquid stocks, what can be done to ensure tradability of minimum variance portfolios?
TOPICS: Passive strategies, analysis of individual factors/risk premia, VAR and use of alternative risk measures of trading risk, volatility measures
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