Strategies · Library · Indexes
§6.5Hedges and structures
Index volatility targeting with risk-free asset
Hold an index and cash so that portfolio volatility stays near a target: the index weight is the target divided by recent index volatility. Rebalance on schedule or when weight shifts enough.
Open in the builderAs a long-only proxy; see how ARCANE uses it.
- Asset class
- Indexes
- Held for
- Months
- Data
- ARCANE has the data
- Symphony
- Builds as a long-only proxy
The rule
- Signal
- Index volatility estimate and target level
- Entry and exit
- Rebalance weekly or monthly, or when the weight change passes a threshold.
- Sizing
- Index weight = target volatility / index volatility, rest in Treasury bills
How it fails
- Volatility estimates lag
- Whipsaw
- Cap at 100% without leverage
Data it needs
- daily adjusted closes
Daily closes for SPY and BIL are available.
How ARCANE uses it
Alpha can state the current volatility-targeted index weight for a risk Call (paper only).
Builds as a long-only proxy. Inverse-volatility style mix of SPY and BIL; target volatility cap is approximate.
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §6.5, p. 81 of the SSRN version. Described in our words. Hedges and structures is ARCANE’s filing, not the book’s.