RT Journal Article SR Electronic T1 Volatility Targeting: The Bridge Between Options-Based and Traditional Defensive Strategies JF The Journal of Portfolio Management FD Institutional Investor Journals SP 156 OP 173 DO 10.3905/jpm.2021.1.238 VO 47 IS 6 A1 Ryan Poirier YR 2021 UL https://pm-research.com/content/47/6/156.abstract AB Defensive strategies have been in high demand since the Global Financial Crisis. For almost a decade, investors mainly had two traditional strategies from which to choose: minimum volatility and low volatility. Buffer strategies have become a third option, using derivatives to create known payoffs at maturity. The author demonstrates that volatility targeting is an effective fourth option. Although the payoff certainty of the buffer strategy at maturity may appeal to some investors, the equivocal decision to allocate to one monthly series versus another may leave investors with uncertainty. Backtested simulations highlight the restrictive upside participation of the buffer series, with only the July series delivering investors a higher Sharpe ratio than the three other defensive strategies. Finally, factor replicated portfolios demonstrate that volatility targeting is not synonymous with either low/minimum volatility or buffer-type strategies but, rather, has characteristics of all three, making it an effective, best-of-both-worlds allocation tool for defensive investors going forward, especially given the current level of interest rates.TOPICS: Portfolio construction, options, simulations, performance measurementKey Findings▪ Ambiguous portfolio characteristics result in uncertainty regarding which monthly buffer series is optimal for portfolio allocation.▪ Risk control circumvents many disadvantages of other defensive strategies (including interest rate risk) while also providing additional tail-risk benefits.▪ A risk control series can be replicated from factor exposures strictly from a mixture of a buffer series and two traditional defensive series (low volatility and minimum volatility), indicating a best-of-both-worlds strategy.