Comparing Volatility-Targeted and Fixed-Size Trend-Following Systems
Summary
The document compares four moving-average crossover approaches on a diversified futures portfolio: fixed-size systems with stop or signal exits, a binary system that adjusts exposure for volatility, and a continuous forecast system that also targets volatility. It examines how volatility targeting changes position sizes during trades and compares performance using realized volatility, returns, Sharpe ratio, costs, skew, downside tails, drawdown, and compounded growth. The author argues that Sharpe ratio alone is an imperfect comparison when return distributions differ, so also evaluates each strategy at its optimal leverage.
Across the reported tests, the volatility-targeted approaches generally show stronger risk-adjusted returns and higher optimized compounded growth, while fixed-size trend following tends to have more positive skew. Turnover and costs are higher for volatility-targeted systems, and results vary with trading speed and exit method. Very slow rules appear to weaken across several measures, but their findings are especially uncertain because they rely on relatively few independent observations. The analysis is specific to the chosen futures universe, weights, models, and historical data; it does not establish that the rankings will hold in other settings.
Key ideas
- Volatility targeting changes position sizes as volatility shifts during an open trade.
- The comparison separates the effect of volatility targeting from differences in forecast design and exit rules.
- Fixed-size trend-following systems tend to have more positive skew, while volatility-targeted variants generally lead on reported risk-adjusted and optimized growth measures.
- Volatility targeting can increase trading activity and costs, especially for faster rules.
- Results for very slow systems are uncertain because their backtests contain relatively few independent observations.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.