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Low-Risk Investing without Industry Bets

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  • Clifford S. Asness
  • Andrea Frazzini
  • Lasse H. Pedersen

Abstract

The strategy of buying safe low-beta stocks while shorting (or underweighting) riskier high-beta stocks (“betting against beta”) has been shown to deliver significant risk-adjusted returns. Some have suggested, however, that such “low-risk investing” delivers high returns primarily because of industry bets that favor a slowly changing set of stodgy, stable industries. The authors refute this notion by showing that a strategy of betting against beta has delivered positive returns both as an industry-neutral bet within each industry and as a pure bet across industries.The strategy of buying safe low-beta stocks while shorting (or underweighting) riskier high-beta stocks (“betting against beta,” or BAB) has been shown to deliver significant risk-adjusted returns. Some have suggested, however, that such “low-risk investing” delivers high returns primarily because of industry bets that favor a slowly changing set of stodgy, stable industries over their opposites. We refute this notion by showing that a strategy of betting against beta has delivered positive returns both as an industry-neutral bet within each industry and as a pure bet across industries. In fact, the industry-neutral BAB strategy has delivered positive returns in each of 49 US industries and in 60 of 70 global industries, a remarkable consistency. Our findings are consistent with the leverage-aversion theory of why low-beta investing is effective.

Suggested Citation

  • Clifford S. Asness & Andrea Frazzini & Lasse H. Pedersen, 2014. "Low-Risk Investing without Industry Bets," Financial Analysts Journal, Taylor & Francis Journals, vol. 70(4), pages 24-41, July.
    • Handle: RePEc:taf:ufajxx:v:70:y:2014:i:4:p:24-41
    DOI: 10.2469/faj.v70.n4.1
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    Cited by:

    1. Calvet, Laurent E. & Betermier, Sebastien & Jo, Evan, 2019. "A Supply and Demand Approach to Equity Pricing," CEPR Discussion Papers 13974, C.E.P.R. Discussion Papers.

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