TY - JOUR T1 - A Multi-Factor Strategy for Index Alpha Enhancement JF - The Journal of Index Investing SP - 67 LP - 79 DO - 10.3905/jii.2019.9.4.067 VL - 9 IS - 4 AU - Roy Henriksson AU - Joshua Livnat AU - Patrick Pfeifer AU - Margaret Stumpp Y1 - 2019/03/31 UR - https://pm-research.com/content/9/4/67.abstract N2 - Empirical studies suggest that the so-called “low volatility anomaly” is actually an artifact of skewness preferences—a tendency of investors to prefer stocks offering upside potential with low likelihood of loss. The authors argue that if skewness preferences underlie the low volatility anomaly, then a naïve low volatility strategy should be dominated by one that explicitly targets expected return skew. This article provides empirical evidence to that effect. It recommends a multi-factor alpha strategy that is based on avoiding index constituents that are perceived to have ex ante high relative skew. These findings have important implications for investors. Specifically, the authors demonstrate that portfolios constructed to avoid high expected skew stocks outperform both low volatility strategies and several widely used US and global capitalization-weighted indices.TOPICS: Analysis of individual factors/risk premia, performance measurement, portfolio construction ER -