Betting Against Beta
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What they found
The authors argue that because many investors cannot or will not use leverage, they reach for return by buying high-beta assets, pushing their prices up and their expected returns down. The prediction is that low-beta assets have higher risk-adjusted returns than high-beta assets. A 'betting against beta' portfolio that goes long leveraged low-beta assets and short de-leveraged high-beta assets earned strong, positive returns in U.S. and international stocks, Treasuries, credit, and futures. The strategy's returns fell when funding constraints tightened.
What you can use
- High-beta, high-flying stocks have historically delivered worse risk-adjusted returns than boring low-beta ones.
- Leverage on safe assets has beaten concentration in risky ones over long samples, though leverage brings its own risks.
- The strategy suffers when funding gets tight (margin calls, credit crunches), so it is not a free lunch.
Caveats
Requires leverage and shorting that retail accounts cannot cheaply access. Some replications find the effect is weaker after adjusting for how beta is estimated and for the treatment of hard-to-borrow stocks.
Tags: factor, low-beta, leverage, multi-asset
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.