Tactical Volatility Strategy

Tactically shift between short and long volatility exposure using an ensemble of volatility models to maximize returns

How it beats passive

SPYConservativeAggressive
Growth of $10,000$39,229$1,795,202$3,963,076
Annualized Return (CAGR)9.97%43.28%51.33%
Annualized Volatility20.35%19.25%22.54%
Sharpe Ratio0.492.252.28
Ulcer Performance Index0.710.7510.77
Max Daily Drawdown-55.2%-15.92%-18.47%
Max Monthly Drawdown-50.8%-11.03%-12.54%

Summary Statistics

The power of geometric growth can be seen with how the conservative and aggressive variants returned 46 times and 101 times returns of the SP500 respectively.

The sharpe ratio (return per unit of risk) of both the conservative and aggressive variants are 4.6 times that of the SP500.

In addition to this, our strategy avoids the huge drawdowns that SP500 has had during recessions. (instead benefiting from the long volatility exposure)

The monthly and annual returns of the aggressive variant of the backtested strategy since 2006 are given in the table. Months with more than +2% returns are highlighted green and less than -2% returns are highlighted red.

We have been live-trading the aggressive variant of the strategy since April 2020.

The conservative and the aggressive version of the strategy had a maximum monthly drawdown of 11% and 12.5% respectively compared to the maximum monthly drawdown of the SP500 at 50.8%.

ConservativeAggressive
Daily53.12%54.93%
1 Month57.8%59.54%
3 Months68.42%71.35%
6 Months71.43%76.19%
1 Year77.16%82.1%
3 Year98.55%100.0%
5 Year100.0%100.0%
7 Year100.0%100.0%

What are base rates?

Base rates are the batting average of a strategy. A base rate of 60% for monthly returns means over all rolling periods of a month, the strategy beat the SP500 60% of the time.

Notice how both the conservative and aggressive variants beat the SP500 over all 5 and 7 year rolling periods.

The scatter plot shows how the aggressive strategy’s daily returns are very uncorrelated with SP500 returns. 

Additionally, the convex impact of tactical long volatility exposure can be seen when the SP500 daily returns are very negative. It is during these times where our strategies truly shine. Traditional asset classes correlations all go to 1 during these times. This is exactly where long volatility exposure gives us the most benefit.

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