The Low-down on Low-risk Investing

Low-risk investment strategies buy or overweight low-risk assets and sell or underweight high-risk assets. Growth in low-risk investing is stimulating much pro and con debate in the financial community. Which assertions are valid, and which are not? In their February 2020 paper entitled “Fact and Fiction about Low-Risk Investing”, Ron Alquist, Andrea Frazzini, Antti Ilmanen and Lasse Pedersen identify five facts and five fictions about low-risk investing. They employ long-short U.S. stock portfolio strategies to illustrate relative performance of low-risk versus high-risk assets. They consider six statistical and four fundamental risk metrics, emphasizing differences between dollar-neutral and market-neutral strategy designs. Focusing on a few prominent low-risk metrics, they compare performances of low-risk strategies to those based on conventional size, value, profitability, investment and momentum factors. Using daily returns for U.S. stocks since January 1931 and firm fundamental data since January 1957, all through August 2019, they find that:

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