## Figure 1.21. Leveraged and Volatility-Targeting Strategies

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**Canonical URL:** [Figure 1.21. Leveraged and Volatility-Targeting Strategies](https://www.imf.org/-/media/files/publications/gfsr/2017/october/chapter-1/pdf-data/figure1-21.pdf)

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### 1. The Growth of Volatility-Targeting Investors
- Investment strategy table (mid-2017 AUM and growth past three years):
  - Variable Annuities
    - Volatility Target (percent): 8–12
    - Flexibility to Deviate from Volatility Target: Low
    - AUM Mid-2017: $440 billion
    - Growth in AUM Past Three Years (percent): 69
  - CTA/Systematic Trading
    - Volatility Target (percent): 15
    - Flexibility to Deviate from Volatility Target: Medium
    - AUM Mid-2017: $220 billion
    - Growth in AUM Past Three Years (percent): 19
  - Risk Parity Funds
    - Volatility Target (percent): 10–15
    - Flexibility to Deviate from Volatility Target: Medium–high
    - AUM Mid-2017: $150–$175 billion
    - Growth in AUM Past Three Years (percent): ...

- Chart elements and indicators shown:
  - Global equity index volatility (left scale)
  - Global bond index volatility (left scale)
  - VIX index (maximum quarterly level, left scale)
  - Time axis labels include: 2012, 13, 14, 15, 16, 17 and quarterly markers such as 2015:Q1 Q2 Q3 Q4; 16:Q1 Q2 Q3 Q4; 17:Q1 Q2
  - Narrative finding: Lower volatility drives investors to increase financial leverage to meet their return and volatility targets.

### 2. Leverage for a Theoretical Volatility-Targeting Investment Portfolio
- Leverage definition and calculation:
  - The leverage calculation assumes a theoretical investment portfolio consisting of 60 percent global equities/40 percent bonds and an annual return volatility target of 12 percent.
  - Leverage is defined as total investment exposure divided by the net asset value of the portfolio.
  - The calculation uses a 60-day realized volatility moving window on the returns of equity and bond investments.
  - Equity proxy: MSCI World Index.
  - Bond proxy: Bloomberg Barclays Global Aggregate Total Return Value Unhedged index.
- Charted series:
  - Leverage of 60/40 portfolio with a 12 percent volatility target (right scale; sixty-day moving average).
  - Observation: Lower realized volatility leads to higher calculated leverage to maintain the 12 percent target.

### 3. Global Equity Exposure for a Representative Volatility-Targeting Investment Portfolio
- Representative portfolio and exposure measurement:
  - The S&P 500 index exposure for a representative volatility-targeting investment strategy uses the AQR Risk Parity mutual fund as its proxy portfolio.
  - Exposure data are obtained using Bloomberg’s port function and reflect the percentage exposure of the fund’s portfolio to equity index futures as a percentage of market value.
- Charted series and scales:
  - Exposure to global non-US equities (right scale)
  - Exposure to US equities (right scale)
  - VIX index (maximum quarterly level, left scale)
- Key behavioral finding:
  - Rising equity exposures resulting from low volatility are prone to sharp reductions during volatility spikes.
  - Specific episode: Sharp reduction in equity exposures as volatility spiked in August 2015.

Sources: Annuity Insights; Barclays Capital; BarclayHedge; Bloomberg Finance L.P.; Federal Reserve; Investment Company Institute; and IMF staff calculations.

*Figure 1.21. Leveraged and Volatility-Targeting Strategies*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2017/october/chapter-1/pdf-data/figure1-21.pdf_