How to benchmark low-volatility strategies

How to benchmark low-volatility strategies

14-07-2011 | リサーチ

What is the best way to measure the performance of a strategy focused on risk-adjusted return? David Blitz and Pim van Vliet answer this question in their article, Benchmarking Low-Volatility Strategies, published in the Journal of Index Investing.

  • David Blitz
    PhD, Executive Director, Head of Quant Selection Research.
  • Pim  van Vliet, PhD
    van Vliet, PhD
    Managing Director, Head of Conservative Equities - Pim van Vliet

Low-volatility strategies promise less risk and better risk-adjusted returns than a passive investment in market-capitalization-weighted index. With such a goal, it makes sense that evaluating the performance of these strategies must involve something more than simply comparing returns with a market-cap weighted index.

In their paper, Benchmarking Low-Volatility Strategies, David Blitz, Head, Robeco Quantitative Equity Research, and Pim van Vliet, Portfolio Manager, Robeco Quantitative Equity study the alternatives and recommend two solutions depending on how investors define risk.

Benchmarks should be investable not theoretical

"Selecting a benchmark for a low-volatility strategy is not as straightforward as it might seem," says Blitz. "To begin with, a benchmark should represent an investable portfolio." The problem is that a minimum-volatility portfolio can only be determined with hindsight. It is not, as the researchers say, "observable" beforehand.

Blitz and Van Vliet also ruled out choosing a benchmark based on investable minimum-volatility portfolios as described in academic literature. “Although the long-term volatility reduction achieved by these various approaches is similar, the differences in portfolio composition may result in return divergences in the short run,” says Van Vliet. “It is therefore ambiguous to elevate the status of any one particular approach to the level of benchmark for low-volatility investment strategies in general.”

Benchmarks should be transparent

Of course, there are also the MSCI Minimum Volatility (MV) indices that were introduced in 2008. While there are some factors in favor of using these indices as benchmarks, such as their rules-based construction, modest turnover and ability to be tracked at low cost by passive managers, the authors conclude that they are ultimately less than suitable as benchmarks. This is based on a lack of transparency and subjective decision-making involved in the composition of the indices.

Blitz and Van Vliet also note that the MSCI MV indexes are no more effective in reducing volatility than other, more simple approaches, such as ranking stocks on past beta or volatility.

“The composition of the MSCI MV indices is based on a complex optimization algorithm which involves a sophisticated proprietary risk model,” says Blitz. "A large number of subjective assumptions are involved, for example, related to rebalancing frequency, constraints on stock, country and sector weights as well as constraints on exposures to MSCI Barra risk indices and turnover.”

Benchmarks should be passive

Given the number of subjective assumptions and lack of transparency, Blitz and Van Vliet believe the MSCI indices are closer to being active, not passive, investment strategies. “A benchmark should be passive," says Blitz. "And with a passive strategy, you would expect little or no subjectivity to be involved.”

Solution: use a market-cap index and adjust return for risk

Blitz and Van Vliet conclude that the best approach for investors is to benchmark low-volatility managers against a capitalization-weighted market index and to adjust for risk.

“A straight comparison of returns is not appropriate given that low-volatility strategies tend to exhibit significantly lower risk in terms of volatility and beta,” notes Blitz. He suggests comparing Sharpe ratios, which measure risk-adjusted returns, or Jensen’s alpha, which evaluates the average return of a portfolio above what is predicted by the capital asset pricing model, based on the portfolio's beta and the average market return.

“The choice depends on how the investor defines risk,” notes Van Vliet. “If total volatility, meaning both systematic and idiosyncratic volatility, is most important, the Sharpe ratio is best. On the other hand, if systemic risk (beta) is more relevant, then Jensen’s alpha should be used instead.”

Van Vliet notes that the Sharpe ratio tends to be a more conservative measure, but may be difficult to interpret if returns are negative. Blitz adds, “When using our proposed measures, it may happen that all low-volatility managers turn out to have added value compared to the market index. In this case, it is still possible to distinguish between managers who provided more or less added value by directly comparing their Sharpe ratios or Jensen alphas.” 

For more information, Benchmarking Low-Volatility Strategies.



当資料は情報提供を目的として、Robeco Institutional Asset Management B.V.が作成した英文資料、もしくはその英文資料をロベコ・ジャパン株式会社が翻訳したものです。資料中の個別の金融商品の売買の勧誘や推奨等を目的とするものではありません。記載された情報は十分信頼できるものであると考えておりますが、その正確性、完全性を保証するものではありません。意見や見通しはあくまで作成日における弊社の判断に基づくものであり、今後予告なしに変更されることがあります。運用状況、市場動向、意見等は、過去の一時点あるいは過去の一定期間についてのものであり、過去の実績は将来の運用成果を保証または示唆するものではありません。また、記載された投資方針・戦略等は全ての投資家の皆様に適合するとは限りません。当資料は法律、税務、会計面での助言の提供を意図するものではありません。




商号等: ロベコ・ジャパン株式会社  金融商品取引業者 関東財務局長(金商)第2780号

加入協会: 一般社団法人 日本投資顧問業協会