In 2021, low-vol has complemented popular hedge fund longs
- The recent volatility among popular hedge fund positions has made for dramatic headlines. On days of forced short covering in late January, even common hedge fund longs generated large realized negative active returns, as leveraged long/short investors raised cash or adjusted positions to maintain notional balance.
- Active returns of low-beta equity portfolios were nearly the mirror image of hedge fund long active returns. (Top chart.) We expect low-beta equities to continue to benefit, on a relative basis, on days of hedge fund distress and pressure on hedge fund long holdings.
Hedge Fund Longs and MSCI U.S. Min Vol Index: Active vs. MSCI USA
Sources: Acadian based on data from MSCI and Goldman Sachs. MSCI data: Copyright MSCI 2021, All Rights Reserved. Unpublished. PROPRIETARY TO MSCI. For illustrative purposes only. Results do not reflect transaction costs or other implementation frictions. It is not possible to invest directly in any index. Every Investment program has the opportunity for losses as well as profits. Past results are not indicative of future results.
- Over the long term, long/short equity hedge funds have tended to be long high-beta stocks. Consequently, the excess returns of their longs have been negatively associated with the excess returns of low-volatility portfolios. (Bottom chart.) The correlation between monthly excess returns of the Goldman Sachs Hedge Fund VIP Index* and the MSCI U.S. Minimum Volatility Index is -0.41.
A diversification opportunity?
- While low-volatility strategies have underperformed the market and risk-seeking styles recently, low-vol has delivered a more stable path to excess returns for decades. We believe that the underlying behavioral and structural drivers that have contributed to low-vol’s long-term success remain in place.
- As such, we see opportunity in pairing low-vol strategies with concentrated risk-seeking managers, to diversify risk associated with popular positions while adding an additional long-term and lower-beta return premium.
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