Low Beta/Vol Outperformance
There are many blogs/funds/research promoting low beta stocks as a way to get rich:
- A blog example –Falken
- A fund example –AQR Defensive Fund
- A research example — Betting Against Beta by Frazzini and Pedersen
In general, I’m still in the R&D stage of trying to determine if the low beta strategy (at least in the context of stock selection) is really that different than a “value” factor wrapped in some fancy new clothes. I realize everyone runs their Fama French regression to hold constant HML loadings, but I’m just skeptical…
I am a low-beta sheep, not a value sheep. Trust me.
Hong and Sraer have a pretty cool paper explaining why low-beta might exist as a stand alone anomaly. The basic idea is that stocks with betas above a certain cut-off point and where investors expect a wide dispersion of possible outcomes, end up being overvalued. Why? Because in these high disagreement settings, investors who are extremely pessimistic about the stock will be unable to influence prices because of costly short-selling. Thus, on average, these higher beta, high disagreement stocks end up being overvalued.
Not all high beta is bad; just high beta and high disagreement!
Anyway, still digesting this paper, but thought it would be good to share.
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