@article {Kudoh81, author = {Hideaki Kudoh and Alberto Miazzi and Toru Yamada}, title = {The Low-Correlation Enhancement: How to Make Alternative Beta Smarter }, volume = {24}, number = {4}, pages = {81--91}, year = {2015}, doi = {10.3905/joi.2015.24.4.081}, publisher = {Institutional Investor Journals Umbrella}, abstract = {In this article, the authors find that most alternative beta strategies have a characteristic in common: exposure to the lowcorrelation factor. This factor measures the distance between an alternative beta portfolio and the market-capitalization portfolio via a correlation coefficient. They empirically find that over the long term, strategies exhibiting {\textquotedblleft}lower{\textquotedblright} correlation against the market-cap index tend to deliver higher risk-adjusted returns. This phenomenon is persistent across various stock markets, including U.S., developed, and emerging markets. The low-correlation factor can also be employed to increase the explanatory power of a standard Fama{\textendash}French analysis, reducing the {\textquotedblleft}residual/unexplained alpha{\textquotedblright} of the model. Finally, they show that by increasing exposure to the low-correlation factor during the portfolio construction of an equity strategy, it is possible to enhance its return{\textendash}risk profile. Again, the results are consistent and robustly tested over long time periods, proving how the low-correlation enhancement can add significant value to the most common alternative beta strategies, such as minimum variance, risk parity, and even equal weighting.TOPICS: Factor-based models, statistical methods, developed}, issn = {1068-0896}, URL = {https://joi.pm-research.com/content/24/4/81}, eprint = {https://joi.pm-research.com/content/24/4/81.full.pdf}, journal = {The Journal of Investing} }