Fire! Fire! Is U.S. Low Volatility a Crowded Trade?

Abstract

The rise in popularity of low volatility strategies has been nothing short of breathtaking over the past three years, with both the explosion of investment research articles and the launch of new products based on this strategy. It is not surprising that, with all the recent attention paid to low volatility strategies, some investors have asked if these strategies are becoming “crowded.” We address this question and play investment detective by investigating potential signs of crowding in low-volatility–based strategies. After examining a number of indicators including investor cash flow, performance, fundamentals, and factors, we find very little evidence of crowding in U.S. low volatility strategies. Because low volatility managers can significantly differ both in terms of process and outcome, our empirical results cannot be widely applied across all low-volatility–based strategies. Instead, each low volatility strategy should be assessed on its own merits.

TOPICS: Analysis of individual factors/risk premia, performance measurement