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Judging by his latest “Diary of a Quant,” Man AHL’s Russell Korgaonkar appears to be as exhausted by the year-end investment outlook blizzard as the rest of us. And as he points out, strategists, uh, are not very good at predicting the future.
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Man AHL has long been very passionate about the idea that volatility is actually the best way to predict the near future and adjust your exposure accordingly. This is the (selfish) main point of Mr. Korgaonkar’s post.
Mann AHL calls this “volatility scaling,” but elsewhere this approach is usually referred to as volatility targeting. It is widely used in the trend-following hedge fund sector, risk parity and variable annuity products, and forms the basis of the virtually ubiquitous value-at-risk model.
While some criticize the market for introducing automated feedback loops, it is true that volatility tends to be concentrated. It is equally true that nothing prevents Wall Street and the industrial complex from issuing highly predictable annual investment projections.
But we primarily want to highlight one of Alphaville’s favorite chart formats: a beautifully updated version of the report: Implied Interest Rate Forecast vs. Actual Interest Rate Development Over Time. I did.
It’s an old one, but it’s a good one, and we think it’s good to come back from time to time, especially to remind us how difficult it is to predict the future. Keep this in mind as we head into 2025.