The concept is simple enough: pair two factor strategies with very different return and volatility characteristics, and rebalance them periodically in order to achieve a result that is superior to either strategy independently. I have written about this concept several times before, showing that the concept has merit in both absolute in risk-adjusted terms, whether you pair low volatility with momentum, minimum volatility with momentum, or even if you pair sector proxies for factor indices and match consumer staples with information technology.
A good way to visualize why these barbell strategies make sense is to plot annualized returns versus annualized volatility for each strategy independently, and then to see where on the plot the barbell strategies fall:
As you can see, low volatility, minimum volatility, and consumer staples all generated lower returns than both momentum strategies and the information technology sector, but they did so far with far less volatility. Therefore, the effect of the barbell strategy was to provide a boost to returns to the lower vol strategies, while the low vol strategies dampened the volatility of the momentum plays.
This has played out in real-time during the current COVID 19 crisis that has roiled financial markets and caused huge economic disruption. However, unlike previous downturns over the last quarter century such as the financial crisis of 2007-2009 and the tech bust of 2000-2002, it has been momentum and technology stocks that have held up much better throughout the downturn, and have provided the boost to the barbell strategies, while the lower volatility plays have languished somewhat:
We can see that as of the end of June, both momentum indices as well as the information technology sector had recovered from their spring downturns, while min vol, consumer staples, and especially low volatility were still recovering. Given technology’s huge surge this year despite the pandemic, it is little surprise that the staples – IT barbell was fully recovered as of the end of June. The minimum volatility – momentum barbell was still in a mild drawdown, while the low-volatility – momentum barbell has fared considerably worse.
The COVID 19 crisis has been unique in terms of its impact on markets and industries, and I believe the performance of the various “barbell” strategies so far during the pandemic further validates the concept.
