Swing Trading Signals


Since 2013

  • 100% Quantified, data-driven and Backtested
  • We always show our results!
  • Signals every day via our site or email
  • Cancel at any time!

Low-Risk Investing Without Industry Bets

Last Updated on 10 February, 2024 by Rejaul Karim

In the realm of investment strategies, the notion of purchasing safe, low-beta stocks while simultaneously shorting riskier, high-beta stocks has been an area of significant interest due to its potential for delivering substantial risk-adjusted returns.

However, assertions have been made regarding the influence of industry bets on the high returns associated with this “low-risk investing” approach, suggesting that its success is primarily driven by favoring specific stable industries.

In this context, the research by Asness, Frazzini, and Pedersen challenges this perspective by demonstrating the effectiveness of betting against beta (BAB) strategy as both an industry-neutral bet within each industry and as a pure bet across industries.

Their findings not only disprove the notion of industry bets as the sole driver of strong returns but also reveal the consistency and robustness of the BAB strategy across U.S. and global industries, aligning with the leverage aversion theory for effective low-beta investing.

Abstract Of Paper

The strategy of buying safe low-beta stocks while shorting (or underweighting) riskier high-beta stocks has been shown to deliver significant risk-adjusted returns. However, it has been suggested that such “low-risk investing” delivers high returns primarily due to its industry bet, favoring a slowly changing set of stodgy, stable industries and disliking their opposites. We refute this. We show that a betting against beta (BAB) strategy 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 performed stronger than the BAB strategy that only bets across industries and it has delivered positive returns in each of 49 U.S. industries and in 61 of 70 global industries. Our findings are consistent with the leverage aversion theory for why low beta investing is effective.

Original paper – Download PDF

Here you can download the PDF and original paper of Low-Risk Investing Without Industry Bets.

(An option to download will come shortly)

Author

Clifford S. Asness
AQR Capital Management, LLC

Andrea Frazzini
AQR Capital Management, LLC

Lasse Heje Pedersen
AQR Capital Management, LLC; Copenhagen Business School – Department of Finance; New York University (NYU); Centre for Economic Policy Research (CEPR)

Conclusion

In conclusion, the research conducted by Asness, Frazzini, and Pedersen provides compelling evidence that challenges the prevailing notion of low-risk investing’s success being primarily attributed to industry bets.

The study showcases the supremacy of the betting against beta (BAB) strategy, demonstrating its capacity to deliver positive returns as an industry-neutral bet within each industry and as a pure bet across industries. Notably, the industry-neutral BAB strategy has exhibited even stronger performance than the BAB strategy that solely bets across industries.

Moreover, the consistent delivery of positive returns across a broad spectrum of U.S. and global industries underlines the robustness of the BAB approach. These findings align with the leverage aversion theory, affirming the efficacy of low beta investing and shedding light on its capacity to generate significant risk-adjusted returns independent of industry dynamics.

This research holds substantial implications for investors seeking to navigate low-risk investment strategies with a focus on beta-averse approaches.

Related Reading:

Beta herding through overconfidence: A behavioral explanation of the low-beta anomaly

The Pollution Premium

FAQ

What is the main focus of the research by Asness, Frazzini, and Pedersen on “Low-Risk Investing Without Industry Bets”?

The main focus of the research is to investigate the effectiveness of the betting against beta (BAB) strategy in the context of low-risk investing. The authors aim to challenge the notion that the success of low-risk investing is primarily driven by industry bets, where stable industries are favored. They examine whether the BAB strategy can deliver positive returns as both an industry-neutral bet within each industry and as a pure bet across industries.

What is the key contention that the research challenges regarding low-risk investing?

The research challenges the contention that the success of low-risk investing is mainly due to industry bets, where the strategy favors stable industries. The authors aim to disprove this idea and demonstrate that the betting against beta (BAB) strategy can deliver positive returns independently of industry dynamics.

How does the research address the influence of industry bets on low-risk investing, and what are the key findings?

The research addresses the influence of industry bets by examining the performance of the betting against beta (BAB) strategy as both an industry-neutral bet within each industry and as a pure bet across industries. The key findings indicate that the industry-neutral BAB strategy has delivered positive returns and performed even stronger than the BAB strategy that solely bets across industries. This suggests that low-risk investing, through the BAB strategy, can be effective without relying on industry bets.

Get All Stocks And Equities Research Papers Strategies here

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}

Monthly Trading Strategy Club

$42 Per Strategy

>

Login to Your Account



Signup Here
Lost Password