The art and skulduggery of finance is infused with uncertainty.
So, how about we try to smooth volatility a little and see the consequences?
The VIX predicts the volatility of the S&P 500 for the next thirty days.
Our Steady Vol strategy takes the inverse of the current VIX and weighs our holding in the S&P 500 accordingly.
If predictions of volatility increase, we reduce our holding of the S&P 500, and vice versa.
weight.INDEX_GSPC = 1/latestVix;
The volatility of our Steady Vol's returns stays consistent over time.
In fact the standard deviation of annual standard deviations is only 2.5% compared to 7%.
Over the whole 25 years, the Steady Vol strategy's Sharpe accrues about a third more than the plain S&P 500 (0.6 vs 0.45).
On a yearly basis both Sharpe ratios are indistinguishable however.
I suspect the Steady Vol accrues very small compounded return wins over the short term (such as avoiding large losses) leading to very large gains in the long term.
As I have written about before, no one invests in anything halfway exotic for 25 years straight. Unfortunately the Steady Vol strategy doesn't deliver steadier yearly Sharpe ratios - if anything it is slightly inferior over the short term!
Perhaps over the medium term I can show steadier risk adjusted performance - in a future post.