Low-Risk Investing without Industry Bets

Clifford S. Asness, Andrea Frazzini and Lasse H. Pedersen

Financial Analysts Journal, 2014, vol. 70, issue 4, 24-41

Abstract: The strategy of buying safe low-beta stocks while shorting (or underweighting) riskier high-beta stocks (“betting against beta”) has been shown to deliver significant risk-adjusted returns. Some have suggested, however, that such “low-risk investing” delivers high returns primarily because of industry bets that favor a slowly changing set of stodgy, stable industries. The authors refute this notion by showing that a strategy of betting against beta has delivered positive returns both as an industry-neutral bet within each industry and as a pure bet across industries.The strategy of buying safe low-beta stocks while shorting (or underweighting) riskier high-beta stocks (“betting against beta,” or BAB) has been shown to deliver significant risk-adjusted returns. Some have suggested, however, that such “low-risk investing” delivers high returns primarily because of industry bets that favor a slowly changing set of stodgy, stable industries over their opposites. We refute this notion by showing that a strategy of betting against beta has delivered positive returns both as an industry-neutral bet within each industry and as a pure bet across industries. In fact, the industry-neutral BAB strategy has delivered positive returns in each of 49 US industries and in 60 of 70 global industries, a remarkable consistency. Our findings are consistent with the leverage-aversion theory of why low-beta investing is effective.

Date: 2014
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DOI: 10.2469/faj.v70.n4.1

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