In this 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?
Authors
Melissa R. Brown, CFA
Managing Director of Applied Research
Olivier d'Assier
Senior Principal, Applied Research - APAC
Christoph Schon, CFA, CIPM
Senior Principal, Applied Research
Diana R. Baechle, PhD
Director, Applied Research
Natan Borshansky
Manager, Applied Research
