Improving volatility-managed portfolios in real time

Recent studies find poor out-of-sample performance for volatility-managed portfolios. I propose a simple improved strategy based on Moreira and Muir (2017)’s formation of volatility management. The improved volatility management features effective risk scaling, conditional expected return, and intercept from conditional risk-return tradeoff. Using this strategy for a comprehensive set of 197 risk factors and anomaly portfolios, I document significant real-time performance improvements including 148 Sharpe ratio increases and 165 positive abnormal returns. The performance survives robustness checks of leverage constraints, transaction costs and different design choices.