Recently I’ve had several of my consulting clients come with a strategy that uses Inverse Volatility Position Sizing. The basic idea is that the more volatile positions have smaller size while the less volatile ones get a larger size. I have always been a fan of equal position sizing for several reasons. One, it is simple to do. Two, it is one less variable to optimize on and thus overfit on. Three, I rarely see much change in the metrics I care about when using more sophisticated algorithms.
Inverse Volatility Position Sizing is said to slightly reduce returns but has a big decrease in drawdowns and an increase in Sharpe Ratio. Time to test and see if that is true.
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Good Quant Trading,
Cesar
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