Australian Steady Vol

In a round about way from New York to Singapore, I landed in Oz in 2012.

It was like walking into a pre '08 New York or Ireland with funnier accents.

They call '08 the 'GFC' or the 'Global Financial Crisis' and talk about it in a sort of detached way - because that tidal wave never hit their shores.

In any case, the 'Volatility Fighter' reminded me of 'Steady Vol' (i.e. inversely weighting holdings with respect to realised volatility) and Australia.

When you apply Steady Vol to the Australian All Ordinaries this is what you see.

The Sharpe Trajectory avoids 'Black Monday' in '87 to some degree and side steps '08 too.

Not 100% sure what happened during the downturn of '03 - my Australian knowledge ain't too deep.

What does that picture mean vis a vis Sharpe ratios?

AORD has a Sharpe of 0.4 over 30 years whereas Steady Vol has a Sharpe of over 0.8.

Encouragingly too, the skewness jumps from -4 to +0.5!

A few provisos.

Firstly, I haven't included the RBA rate in this calculation, but the calculation only uses a daily holding period.

Secondly, the Max Wait is only 5 years - but that's the same as the All Ords itself.

Lastly, I haven't included any FX returns, we are assuming the point of view of an Australian investor.

That reminds me, Australian's love of hedging away FX risk. Whiling my six months away in Sydney, I suspected many Superannuation funds and the like were missing a trick - i.e. reducing their FX massive hedges a little; lowering costs; and using a little surplus FX risk as a massive diversifier of wider portfolio risks.

Future blog post, no doubt.

Code for the Lazy Backtest IDE is here.