A Horse Race of Low-Beta Equity Strategies

Low beta is not low risk

February 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • Not all low-beta strategies offer lower risk than the stock market
  • Most have generated lower Sharpe ratios than the stock market
  • Most underperform simple equities & treasury combinations

INTRODUCTION

The core concept behind long-short equity hedge funds is to provide lower risk than the broader stock market while delivering reasonable returns. However, due to high fees and the challenges of navigating highly efficient markets with limited alpha opportunities, these funds often resemble diluted equity exposure (read Myth Busting: Alts’ Uncorrelated Returns Diversify Portfolios).

Instead of engaging in the costly and time-intensive process of manager selection and monitoring, investors can achieve similar outcomes by replicating long-short equity hedge funds through straightforward equity-cash combinations, which are both cheaper and more efficient (read Replicating Popular Investment Strategies with Equities + Cash).

While long-short equity hedge funds have largely failed to meet their objective of delivering superior Sharpe ratios compared to the stock market, they do serve a niche purpose: catering to investors who prefer to avoid seeing significant portfolio drawdowns on their statements, even if it means opting for a product that offers little more than a blend of the S&P 500 and cash.

In this research article, we will analyze long-short equity hedge funds available through ETFs and explore comparable low-beta strategies.

PERFORMANCE OF LOW-BETA STRATEGIES 

We analyzed the following low-beta strategies: Invesco S&P 500 Low Volatility ETF (SPLV), iShares MSCI USA Min Vol Factor ETF (USMV), Innovator Laddered Allocation Power Buffer ETF (BUFF), Global X S&P 500 Covered Call ETF (XYLD), WisdomTree PutWrite Strategy Fund (PUTW), Invesco S&P 500 BuyWrite ETF (PBP), Invesco S&P 500 Downside Hedged ETF (PHDG), ProShares Hedge Replication ETF (HDG), and First Trust Long/Short Equity ETF