Acadian's minimum variance strategies seek to minimize risk at the portfolio level. This differs from building portfolios that focus singularly on holding a collection of low risk stocks. Acadian's approach puts the primary emphasis on choosing stocks with low systematic risks (low beta) and, to a lesser extent, on stocks with low total risk. The primary difference between a low risk portfolio and a portfolio of low risk stocks is that the correlation between stocks influences the composition of the former, but not the latter. The low risk portfolio approach produces a portfolio of low risk stocks with low correlations to each other. Incorporating this additional information yields a lower risk portfolio than simple sorting based approaches which primarily emphasize a single dimension of risk like volatility or beta.
Our managed volatility portfolios take the low volatility concept a step further by incorporating persistent exposure to Acadian’s return forecasts. Once we consider market frictions like transaction costs, liquidity and certain prudent constraints we are able to identify a number of potential portfolios with approximately the same expected risk characteristics. Acadian’s managed volatility approach uses Acadian's return forecasting framework to choose the portfolio with the highest expected return among these low risk portfolios. This results in portfolios which we believe may offer higher returns than a simple minimum variance portfolio would offer.