Volatility-Managed SPY (10% target): does it still work? Replicated through 2026
We re-ran it on S&P 500 from 2010-02-02 to 2026-11-10 (16.8 years, before costs): +9.6% a year, Sharpe 0.95, worst drawdown -12.8%. The benchmark, S&P 500 buy-and-hold, did +14.1% a year (Sharpe 0.86, worst drawdown -33.7%).
Verdict: About the same risk-adjusted return as its benchmark. Historical, hypothetical results before costs, taxes and fees. Not investment advice.
This is our adapted version, not the real portfolio or fund. Read what is lost before comparing it with anything published about the original.
What is lost
- The paper's monthly realised-variance scaling and its factor portfolios.
- No leverage: in calm markets the original would run above 100%.
Where it comes from
A highly cited paper showing that risk scaling beats plain buy-and-hold, the basis of risk-managed funds.
Rules, weights and thresholds are given as commonly cited. We have not re-checked them against the primary text.
The original rules
Scale the exposure to a risk factor inversely to its recent realized variance, holding less when volatility is high, which raised risk-adjusted returns; this is the basis of volatility targeting.
How we replicate it
What we changed
The paper scales a factor by the inverse of last month's realised variance. We use a simpler daily version: the SPY weight is 10% divided by the annualised 20-day volatility, capped at 100% (no leverage), the rest in cash.
The exact rule we run
Every day at the close: sigma = standard deviation of the last 20 SPY daily returns times the square root of 252. SPY weight = the smaller of 100% and 10% / sigma; the rest is cash.
Conventions: Position decided at a close earns the next day's return; no look-ahead; before costs; cash earns 0%; starts 2010-02-02, the first day a signal exists; every market has an equal slot of equity; indicators use each market's own trading days.
Growth of 1 vs the benchmark
Benchmark: S&P 500 buy-and-hold, same period. Bought on the first day and held.
Drawdown from the previous peak
Key numbers
Sample: 2010-02-02 to 2026-11-10, 16.8 years, 4220 daily observations. Annualised from the number of observations per year of the strategy's own calendar. Before costs.
Recent and full-period returns
| Period | Replica | Benchmark |
|---|---|---|
| Last month | -3.9% | -3.7% |
| Last year | +4.2% | +11.2% |
| Last 5 years | +44.2% | +72.9% |
| Whole period (cumulative) | +364.1% | +812.6% |
Calendar-year returns
| Year | Replica | Benchmark | Replica minus benchmark |
|---|---|---|---|
| 2026* | +4.4% | +10.8% | -6.5% |
| 2025 | +10.5% | +17.7% | -7.2% |
| 2024 | +17.6% | +24.9% | -7.3% |
| 2023 | +17.1% | +26.2% | -9.1% |
| 2022 | -10.1% | -18.2% | +8.1% |
| 2021 | +18.4% | +28.7% | -10.3% |
| 2020 | +10.7% | +18.3% | -7.6% |
| 2019 | +17.4% | +31.2% | -13.8% |
| 2018 | -1.4% | -4.6% | +3.1% |
| 2017 | +21.7% | +21.7% | -0.0% |
| 2016 | +7.9% | +12.0% | -4.1% |
| 2015 | -2.4% | +1.2% | -3.6% |
| 2014 | +7.3% | +13.5% | -6.1% |
| 2013 | +23.9% | +32.3% | -8.4% |
| 2012 | +10.6% | +16.0% | -5.4% |
| 2011 | -0.2% | +1.9% | -2.1% |
| 2010* | +13.8% | +16.2% | -2.4% |
* Partial year. The first year starts on the first day of the replica; the current year is year to date.
Position as of 2026-11-10
| Holding | Weight |
|---|---|
| S&P 500 SPY | 45.4% |
| Cash (0%) | 54.6% |
Last change of position: 2026-11-10. Drawdown from its peak today: -4.0%.
What it did in 2020 and 2022
| Episode | Dates | Replica | Benchmark |
|---|---|---|---|
| COVID crash | 2020-02-19 → 2020-03-23 | -11.3% | -33.7% |
| 2022 bear market | 2022-01-03 → 2022-10-12 | -12.6% | -24.5% |
Close to close between the two dates. Two episodes only: not enough to judge a strategy.
How much to trust it
- 2979 position changes over 16.8 years.
- This is one backtest on one path of history, before costs and with hindsight on the choice of strategy. It does not show the strategy will work in future.
Honest caveat
The paper's exact method and the 10% target are not identical; this is the commonly used practical implementation.
Related
Other famous strategies
Closest strategies on Quant Arena
Similar idea, tested on the site's own rule set; not the same rule.
Markets used: S&P 500
Historical, hypothetical results before costs, taxes and fees. Not investment advice.