David Blitz was named winner of the Peter L. Bernstein Award for his research paper in the summer 2018 edition of The Journal of Alternative Investments entitled ‘Are hedge funds on the other side of the low volatility trade?’ The award is for the “best paper published in 2018” drawn from more than 300 articles published across about a dozen journals in the ‘Portfolio Management Research’ series.
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 noted 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 found that rather than benefiting from the anomaly, hedge funds overall tended to bet against it.
He concluded 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 had been poor in many instances in the run-up to when the article was published.
The journal’s award is made in honor of Peter Bernstein, an American economist whose work on the efficient-market hypothesis made him a world expert on investment economics and one of the pioneers of quant investing.
The winning article was chosen through a blind review process by an independent committee that comprised Gary Gastineau of ETF Consultants, William Goetzmann of the Yale School of Management, and Ronald Kahn of BlackRock.
“This paper impressed me along dimensions that Peter Bernstein would have appreciated,” says Kahn. “Hedge funds don’t face the usual investor constraints. It’s very surprising then that the low volatility anomaly – which we believe arises due to those constraints – negatively and significantly contributes to their aggregate performance.”
“This is a nice public recognition for the quality of our quantitative research,” says Blitz. “I use this paper a lot in presentations to clients, and have noticed that it is very well received. We always get the question who is on the other side of the low volatility trade, and now we can answer: over three trillion dollars of hedge fund assets!”
He jokingly adds: “When I received a mail with the subject line ‘you have won a prize’ my finger already veered towards the delete button, because it smelled like spam. As it turned out, however, this time I really did win something!”
Blitz won a prize of USD 5,000, which has been donated to the Robeco Foundation.