MCFAM Seminar - Volatility Targeting Is Trendy: Documenting the Trend Exposure Embedded in Volatility-Managed Strategies

Speaker: Benjamin Hood

Abstract:  Why do volatility targeting/management strategies tend to outperform simple buy-and-hold positions in the same assets, as found by Moreira and Muir (2017) and Harvey et al (2018)? We test the hypothesis that this outperformance is mainly due to a loading on trend following that arises because of the negative correlation between return direction (trend) and magnitude (volatility), the so-called “leverage effect.” When controlling for trend exposure, alpha to volatility targeting is shown to mainly accrue to trend for both a long equity history and a set of 14 global equity index futures contracts. By contrast, this is not true for commodity, fixed income, or currency futures, where the leverage effect is not present. We further discuss the mechanical relationship between volatility targeting and trend following, creating a point of connection between these two seemingly different branches of research.

Bio:  Ben is Managing Director of Derivatives Research at Morgan Stanley and Parametric Portfolio Associates.  Research interests include alternative risk premia, volatility and risk modeling, and multi-asset portfolios.  Prior to joining Parametric, he worked as a vice president of research at AQR Capital Management.  Ben’s work has been published in the Review of Financial Studies, the Journal of Derivatives, and the Financial Analysts Journal.  He earned a PhD and MA in economics from UCLA, as well as a BS in economics with honors and BA in mathematics from the University of Minnesota.

MCFAM Seminar