Index providers to apply minimum volatility success to other asset classes

Index and exchange-traded fund (ETF) providers are looking to apply minimum volatility and risk-control strategies to other asset classes aside from equities, according to industry participants.

“Product providers are looking beyond equities,” says Xiaowei Kang, London-based director of index research and design at S&P Dow Jones Indices. Some researchers are looking at whether there is a similar low-volatility anomaly within fixed income and commodities, says Kang. “For instance, whether higher quality bonds and less volatile commodities tend to deliver relatively better risk-adjusted performance over the long term.”

Some participants are also looking at multi-asset-class risk-based strategies, he says. Multi-asset risk parity portfolios, for instance, aim to provide better diversification than traditional portfolios.

“In traditional balanced portfolios, the equity allocation tends to be very dominant in terms of risk,” says Kang. Risk parity strategies, on the other hand, would focus on risk factors rather than asset classes as the building blocks of asset allocation.

Applying volatility control to other asset classes is also something product providers are exploring, according to industry participants. This strategy would benefit structured products, says Gareth Parker, London-based senior director at Russell Investments.

“For a structured products provider, it would also have the great advantage of reducing the cost of creating the structured product because the swap that is often used for the payout will be cheaper if the future volatility of the underlying is known,” says Parker.

 

This article was first published on Risk

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