Low-volatility stocks, not momentum, produced a book positive in every completed year
Every quantitative investor eventually asks a version of the same question: can you build an Indian equity book that does not have a losing year? Not one that wins spectacularly, but one that simply never hands back a full calendar year of losses. Strota put eleven rounds of testing into that question. The answer it arrived at is close to the opposite of where the research began. Momentum, in every form it was tried, could not deliver it. A portfolio of the market's dullest, least volatile liquid stocks did.
In the test, that low-volatility version finished positive in every completed calendar year from 2017 to 2025, net of fees. The annual figures run +25, +8, +20, +44, +45, +4, +28, +14 and +5 percent. The unfinished 2026 stretch sits fractionally negative, at -1. Across the whole window the measured Sharpe ratio, which is return per unit of volatility and where anything above 1 is usually called good, came out at 1.84, alongside a compound annual growth rate of roughly 20%.
The route to that result is more instructive than the result itself. Earlier versions of the study were built on residual momentum, the practice of buying whatever has been rising after stripping out the market's own move. Momentum's average return was never the problem. The problem was that the good outcome leaned on two enormous years and then broke down in bear phases. So the work turned to patching the bad years with timing rules, and the patches all failed in their own way.
Trend-following to cash whipsawed, exiting after the damage and re-entering after the recovery. An unhedged index short during downtrends broke 2018 outright. Volatility targeting quietly levered the book up going into 2023. Three separate drawdown brakes each either lagged the turn or simply moved the loss into a different year rather than removing it, and a filter applied stock by stock added nothing. Eleven attempts in, the pattern was clear: no overlay bolted on top of a momentum book could fix a problem that the momentum book was creating.
The version that worked is short enough to describe in a sentence. Start with the top 100 Indian stocks by turnover, the ones traded heavily enough that a real order can actually be filled. Rank those on trailing 120-day volatility and keep the calmest fifth. Hold twenty of them in equal size, refreshed weekly, taken as delivery rather than squared off intraday. Against that equity book, run an intraday short in the index sized at 0.6 times the holdings. Brokerage and the other transaction costs are subtracted, so the annual figures above are what was left after paying to trade.
Why the losing years vanished is not exotic. Defensive, low-volatility stocks tend not to come apart in exactly the phases that punish whatever has been running hot, and the three years that had been the momentum book's weak spots turn positive rather than merely being cushioned: 2018 at +8, 2022 at +4, 2025 at +5. That is the low-volatility anomaly, one of the more heavily documented effects in equity research, doing the work. The finding here is not that the anomaly exists. It is that leaning on it, instead of on trend, is what removed the down years.
Robustness was checked in the obvious place, the size of the hedge. Varying the index short between 0.3 and 1.0 times the equity book leaves the pattern intact at every setting: nine of the ten calendar years positive, with only the half-finished 2026 slightly red. One detail there is a useful warning against over-tuning. The 2025 and 2026 results respond to hedge size in opposite directions, so there is no single setting that rescues both, and a version tuned to make 2026 look better would spoil the year before it.
The work also tracks a concentration reading of 46%, a measure of how far the total result leans on its strongest stretch, and it records that 2023 and 2024 are no longer the outliers doing the heavy lifting, landing at +28 and +14. How that figure is calculated is not spelled out, so it is best read as an improvement relative to the earlier momentum versions rather than against any external standard. The point it captures is real regardless: a result that no longer depends on two exceptional years is a different kind of result.
Now the part that stops this from being a strategy. The level of the return is inflated, and the research is blunt about it. The stock pool was drawn from today's list of India's 500 largest listed names, which means the test only ever traded companies that survived long enough to be on that list. That is survivorship bias, and it flatters any long-only equity backtest. The overnight leg carries a second problem: it is measured at exact opening and closing marks, prices nobody transacts at reliably. Live, the researchers concede, the return would be a fraction of the headline Sharpe near 1.8 and the roughly 20% compound rate.
What survives that discount is the shape of the result, not its size. Positive in every completed year, no crash year, no reliance on 2023 and 2024: that structural property is what the eleven iterations were actually hunting, and it is the piece least likely to be an artefact of optimistic pricing. A haircut on the level does not turn nine positive years into a losing streak. It turns an implausible compound rate into a plausible one.
For a reader, the takeaway is a reframe rather than a trade. The search for a book that never has a down year led away from picking winners and toward owning the least dramatic liquid stocks available, hedged with a short in the index. The defensive tilt is what did the work; every clever timing rule tested alongside it made things worse.
The honest status is unfinished. A paper run against real fills, with actual executed prices and actual slippage, is the only thing that settles whether the overnight portion of this exists outside a spreadsheet. Until that has run, this is a statement about how a particular set of rules behaved in past data and where its robustness came from. It describes what was measured, not what is available.
More money stories
- We tried to make a momentum strategy win every year. The momentum had to go.
- Fading morning gap-ups paid in liquid stocks and lost in illiquid ones
- Widening the stock pool, not the signal, gave this hedged low-volatility test a positive decade
- A short-volatility test on Nifty returned 11.3% a year, inside a 15% drawdown
- Momentum on India's most liquid stocks beat the Nifty — after we found the bug in our own test
- Boring stocks held up better than winners in our re-test of Indian factor books