Applying Volatility Management Across Industries

Volatility management is a risk and portfolio management technique proposed by Moreira and Muir in 2017 [1]. It has since been widely adopted by industry practitioners. The technique relies on the idea that volatility is autocorrelated but only weakly correlated with future returns. Practically, this means increasing exposure to the underlying asset when volatility is low and decreasing exposure when volatility is high. This approach allows investors to improve risk-adjusted returns.

Reference [2] continues this line of research by applying volatility-managed techniques to U.S. industry portfolios. It uses four measures of volatility: one-month realized variance, one-month realized volatility, six-month exponentially weighted moving average (EWMA) of realized volatility, and GARCH-forecasted one-month volatility.

The author pointed out,

From my analysis, volatility management significantly improves the performance of nearly all sector allocations, providing evidence that volatility management can be a useful tool for investors intending to increase exposure to specific industries. Consistent with my prior belief, certain industries respond better to volatility management, including technology and defensive sectors. Although marginally similar in generating enhanced Sharpe ratios, volatility management using a six-month exponentially weighted moving average volatility is the most consistent in delivering strong results in the face of leverage constraints and transaction costs. The strategy boosts the Sharpe ratios for the technology, telecom, and utilities sectors by 27.6%, 30.5%, and 25.5%, respectively. This suggests that volatility management is not just theoretically appealing but practical for a mean-variance investor. However, the statistical significance of volatility-management strategies wanes when testing performance over selected subperiods and recessionary periods. Therefore, I provide evidence that the investors can confidently implement volatility-management strategies for the technology portfolio, over other industries, due to its economically and statistically significant improvements regardless of sample period and transaction costs.

In short, the article concluded that,

• Volatility management using a six-month EWMA volatility measure is the most consistent,
• The strategy improves Sharpe ratios in the technology, telecom, and utilities sectors, though not all sectors benefit equally. Technology performs best due to the persistence of its volatility,
• The statistical significance of volatility-managed strategies weakens when tested over selected subperiods and recessionary periods.

Have you applied volatility management techniques to your portfolio?

Let us know what you think in the comments below or in the discussion forum.

References

[1] Moreira, A., & Muir, T. (2017), Volatility-managed portfolios. Journal of Finance, 72(4), 1611–1644.

[2] Ryan Enney, Sector-Specific Volatility Management: Evidence from U.S. Equity Industry Portfolios, Claremont McKenna College, 2025

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