Higher Volatility, Higher Alpha?

Theoretically, yes, practically, no

October 2023. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Intuitively fund managers should create more alpha when volatility is higher
  • However, neither mutual nor hedge fund managers have been able to do so
  • Likely explained by fund managers being less rational than assumed


“However, a period of higher volatility is ‘a good environment for alpha generation and provides opportunities’.” – Robert Prince, CIO Bridgewater Associates, January 2023

“Above-par volatility regime likely to persist, an optimal equilibrium for hedge funds” – Societe Generale, June 2023

“Following the tightening of monetary policies, we now have a new macro regime characterized by greater volatility – which should also lead to better investing opportunities for hedge funds.” – Goldman Sachs, August 2023

The case for higher alpha at greater market volatility seems obvious – the more volatile markets are, the more irrational investors become. Greed and fear play out in quicker and more extreme cycles, allowing cool-headed fund managers or their machines to make a killing.

However, such nicely laid out theories fail in finance all the time. For example, taking higher risks is not always rewarded with higher returns as the low volatility factor demonstrates, where low-risk stocks outperform high-risk ones, at least on a risk-adjusted basis.

In this research article, we will explore the relationship between alpha and stock market volatility.


Initially, we focus on the alpha generation of mutual funds where data is sourced from the excellent S&P SPIVA Scorecards. These reports compare mutual funds to their benchmarks and compute the outperformance over various periods ranging from one to twenty years. We select three mutual fund categories, namely all U.S. funds, large and small-caps, and differentiate these by volatility regimes using the VIX index (read Volatility-based Equity Allocations).

Only approximately 40% of all U.S. mutual funds managed t