On the Performance of Volatility-Managed Portfolios
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What they found
A direct check on Moreira and Muir. The authors examined 103 equity strategies and found that although volatility-managed versions often show significant alphas in full-sample regressions, a real-time investor who had to choose the scaling from past data would rarely have improved their Sharpe ratio: the out-of-sample gains were small and inconsistent, and the strategies with the best in-sample alphas were not the ones that did well later. The exception was the market portfolio and a few strategies with strong volatility-return trade-offs; for most factors, volatility management did not help.
What you can use
- Volatility targeting is not a universal improvement: for most stock strategies it does not reliably raise the Sharpe ratio when implemented in real time.
- In-sample alpha from a scaling rule is not the same as out-of-sample performance; test any sizing rule on data it has not seen.
- The case for volatility targeting is strongest for broad market exposure and weakest for individual factor bets.
Caveats
Focuses on Sharpe ratio comparisons with specific implementation choices; proponents argue other benefits (drawdown reduction) remain. Both papers are worth reading together.
Tags: volatility, volatility-targeting, out-of-sample, replication
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.