Are mutual funds on the other side of the low volatility trade?

Are mutual funds on the other side of the low volatility trade?

03-04-2019 | From the field

This new research helps to explain the existence of the low volatility anomaly. The paper1 examines holdings in very risky ‘lottery’ stocks of actively managed U.S. equity funds.

  • David Blitz
    Head of Quant Research

Funds that hold more lottery stocks are found to be smaller, younger and poor recent performers, which are characteristics typically associated with their incentives to attract capital. Funds with more retail clientele and lower managerial ownership also hold more lottery stocks. Poorly performing funds tend to increase their lottery holdings towards the end of the year.

Consistent with the existence of the low volatility anomaly, funds with higher lottery holdings are found to significantly underperform their peers, by 4.8% annually. The authors conclude that funds holding lottery stocks aim to gather assets by catering to investor preferences and engaging in risk-shifting behavior. We also like that the results help to explain why the low volatility anomaly is there in the first place, and who is on the other side of this trade.

1Agarwal, Liang & Wen, “Why Do Mutual Funds Hold Lottery Stocks”, working paper, 2018.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

Read all articles
Subjects related to this article are:

Important legal information

The content displayed on this website is exclusively directed at qualified investors, as defined in the swiss collective investment schemes act of 23 june 2006 ("cisa") and its implementing ordinance, or at “independent asset managers” which meet additional requirements as set out below. Qualified investors are in particular regulated financial intermediaries such as banks, securities dealers, fund management companies and asset managers of collective investment schemes and central banks, regulated insurance companies, public entities and retirement benefits institutions with professional treasury or companies with professional treasury.

The contents, however, are not intended for non-qualified investors. By clicking "I agree" below, you confirm and acknowledge that you act in your capacity as qualified investor pursuant to CISA or as an “independent asset manager” who meets the additional requirements set out hereafter. In the event that you are an "independent asset manager" who meets all the requirements set out in Art. 3 para. 2 let. c) CISA in conjunction with Art. 3 CISO, by clicking "I Agree" below you confirm that you will use the content of this website only for those of your clients which are qualified investors pursuant to CISA.

Representative in Switzerland of the foreign funds registered with the Swiss Financial Market Supervisory Authority ("FINMA") for distribution in or from Switzerland to non-qualified investors is ACOLIN Fund Services AG, Affolternstrasse 56, 8050 Zürich, and the paying agent is UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zürich. Please consult www.finma.ch for a list of FINMA registered funds.

Neither information nor any opinion expressed on the website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco/RobecoSAM AG product should only be made after reading the related legal documents such as management regulations, articles of association, prospectuses, key investor information documents and annual and semi-annual reports, which can be all be obtained free of charge at this website, at the registered seat of the representative in Switzerland, as well as at the Robeco/RobecoSAM AG offices in each country where Robeco has a presence. In respect of the funds distributed in Switzerland, the place of performance and jurisdiction is the registered office of the representative in Switzerland.

This website is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, the publication or availability of this website is prohibited. Persons in respect of whom such prohibitions apply must not access this website.

I Disagree