What Is Betting Against Beta (BAB)?

BAB is a factor from AQR that exploits the low-beta anomaly: low-beta assets earn higher risk-adjusted returns than high-beta assets, contrary to the CAPM. The BAB factor goes long a leveraged basket of low-beta securities and short a de-leveraged basket of high-beta securities, so that each leg has a market beta of one. The economic story is that leverage-constrained investors bid up high-beta assets to chase returns, leaving low-beta assets cheap.

Example: BAB took the smallest weight (7%) in Green Lark’s Sharpe-optimal long-only factor portfolio.

Literature and references:

• Andrea Frazzini and Lasse Heje Pedersen, Betting Against Beta, Journal of Financial Economics, 2014.

See also

• AQR

• Beta-hedged

• Factor investing