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Minimum Variance: A Leg Up on Geopolitical Risk?

Oct. 11, 2019

Speaker : Marco Della Seta, Head of Index Applied Research, Qontigo; Olivier d'Assier, Executive Director, Applied Research APAC, Qontigo; Christoph V. Schon. CFA, CIPM, Executive Director, Applied Research, Qontigo

Oct. 11, 2019 Speaker : Marco Della Seta, Head of Index Applied Research, Qontigo; Olivier d'Assier, Executive Director, Applied Research APAC, Qontigo; Christoph V. Schon. CFA, CIPM, Executive Director, Applied Research, Qontigo

In this new Qontigo paper, we take a look at how minimum variance performed vis-à-vis its core market counterpart during nine recent geopolitical risk events. The nature of these events is that they tend to push correlations towards 1.0. This may pose a problem for minimum-variance portfolios, as they are constructed by leveraging the covariance matrix in order to build portfolios with strong systematic hedges, simultaneously going long on negatively correlated factors or (in active space) long and short positively correlated ones.

In these types of crises, is their ability to significantly reduce portfolio risk vis-à-vis a core benchmark hampered? If not, what kind of outperformance can we expect in down-markets, and what are the performance costs of this insurance in up-markets?

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Ladi Williams, Product Manager and Anand Venkataraman, CFA, Head of Product Management Nov. 29, 2019
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