Cliff Asness: Low-risk investing Without industry Risk

Cliff Asness: Low-risk investing Without industry Risk
Photo by geralt (Pixabay)

Cliff Asness: Low-risk investing is based on the idea that safer stocks deliver higher risk-adjusted returns than riskier stocks. This was first documented by Black, Jensen, and Scholes (1972), who found that the security market line was flat relative to the Capital Asset Pricing Model (CAPM).However, for many the intuition behind low-risk investing in stocks is captured in going longs today (but perhaps ultimately profitable!) industries and by an assumption that the returns are driven by value effects. For example:

Cliff Asness: Low-risk investing Without industry Risk

… low volatility strategies have substantial industry tilts that, when removed, substantially reduce volatility-adjusted   returns. Second, low volatility strategies have higher exposure to the value premium 

 —  Shah (Dimensional Fund Advisors, 2011)

Dan Sundheim Founder Of D1 At Sohn 2021 On His Favorite Stock

Jeffrey Aronson Crossroads CapitalAt this year's Sohn Investment Conference, Dan Sundheim, the founder and CIO of D1 Capital Partners, spoke with John Collison, the co-founder of Stripe. Q1 2021 hedge fund letters, conferences and more D1 manages $20 billion. Of this, $10 billion is invested in fast-growing private businesses such as Stripe. Stripe is currently valued at around Read More

While there is nothing per se wrong with a factor that bets on industries, the tone of this criticism often conveys the idea that such bets, particularly when passive (going the same direction for long periods), are perhaps either the result of path-dependent data mining or that industry bets will somehow be particularly dangerous going forward. In any event, it’s a common sentiment regarding these strategies and it is meant to call into question their robustness and efficacy.

We explicitly test how much of the benefit of low-risk investing comes from tilts toward andaway from industries versus stock tilts within an industry. We find that both types of low-risk investing work. However, counter to conventional wisdom, we find that low-risk investing is not driven by low-risk industries — not close  —  and is not  driven by the value effect. Among all the low-risk strategies that we consider, the best ones take no industry bets at all!

There are many closely related forms of low-risk investing. Some focus on market beta (Black, Jensen, and Scholes (1972), Frazzini and Pedersen (2010)), some focus on total volatility(e.g., Baker, Bradley, and Wurgler (2011)), some on residual volatility (e.g., Falkenstein (1994),Ang et. al. (2006, 2009)), and some on still other related measures. We focus on market beta since this is the original measure which is linked to economic theory.

Full report from Cliff Asness on low risk investing below

H/T: EquityNYC

Cliss Asness – Low-Risk Investing Wo Industry Bets(1) by


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