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Hedge funds and the low volatility trade

Hedge funds and the low volatility trade

30-08-2018 | Research
The low volatility anomaly has long been used by Robeco’s quant funds to generate higher returns at lower risk. A study by Head of Quant Research David Blitz suggests that hedge funds may also be targeting it, but on the other side of the trade.

Blitz has examined the issue in an article for the summer 2018 edition of The Journal of Alternative Investments entitled ‘Are hedge funds on the other side of the low volatility trade?’ The 4,200-word piece assesses the degree to which hedge funds attempt to exploit the low-volatility anomaly, in which low risk stocks tend to have returns that are too high. Robeco offers investors access to low risk stocks through its range of Conservative Equities funds.

Blitz notes that various practical constraints might prevent many investors from being able to exploit the anomaly, but that hedge funds generally should be able to do so, given their higher sophistication and flexibility. However, Blitz finds that rather than benefiting from the anomaly, hedge funds overall tended to bet against it.

He concludes that by favoring high volatility stocks to their low volatility counterparts, this may be a key factor for explaining the overall performance of hedge funds, which have been poor up until this point in time.

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