Betting Against Beta (BAB)
TRADE-OFFInvestors who cannot or will not use leverage bid up high-beta assets, so low-beta assets earn higher risk-adjusted returns. BAB levers low-beta assets and shorts high-beta ones to capture the gap while staying beta-neutral.
| THE STRATEGY | $SPX BUY & HOLD | |
|---|---|---|
| Growth a year (CAGR) | 7.6% | 9.0% |
| Return per unit of risk (Sharpe) | 0.74 | 0.66 |
| Worst fall (max drawdown) | -36.3% | -52.6% |
// GROWTH OF $1, LOG SCALE
Tested on years it never saw (from the split): 7.1% a year against 12.4% for the benchmark; Sharpe 0.79 in the training years, 0.65 after.
After 25 bps of trading costs: 4.7% a year. EDGE OVER RANDOM
// DECADE BY DECADE
| ERA | STRATEGY | BENCHMARK |
|---|---|---|
| 1990s | 7.3% | 15.5% |
| 2000s | 5.1% | -2.6% |
| 2010s | 11.5% | 11.6% |
| 2020s | 5.8% | 14.1% |
// THE IDEA, AS PUBLISHED
Frazzini & Pedersen (2014), JFE · 2014
- Estimate beta from 1-year volatility and 5-year correlation, shrunk toward 1
- Split at the median beta and rank-weight each side
- Lever the low-beta leg and delever the high-beta leg to beta 1 each; long low, short high
- Rebalance monthly
A real computation on the QuantGPT warehouse, survivorship-free, walk-forward. Gross returns, no costs except where stated. Past performance is not a promise. Findings, not advice. COMPUTED 2026-09-24 19:41 ON THE QUANTGPT WAREHOUSE: EVERY DELISTED NAME KEPT, FUNDAMENTALS AS FILED. NOT INVESTMENT ADVICE.