Does Volatility Harvesting Really Work?

Abstract

A large number of academic papers claim that there is a consistent advantage to rebalancing an investment portfolio relative to a simple Buy&Hold strategy, while other academic papers claim the opposite. The papers on both sides are typically based on unclear mathematical arguments with only few real-world examples. This paper does not try to give a mathematical explanation but is entirely empirical. We use daily stock-returns for more than 900 U.S. stocks between the years 2007 and 2021, where we generate thousands of random portfolios of different sizes and start/end-dates, to compare the Rebalanced and Buy&Hold strategies on different performance metrics. Although the Rebalanced portfolios may seem to perform better than the Buy&Hold portfolios in terms of e.g. the arithmetic mean daily return, it actually depends on which period we consider. We also make preliminary experiments with intraday data, where it does appear that Rebalancing is consistently better than Buy&Hold, although these data-sets are so small that we cannot conclude this advantage holds in general.

Keywords: portfolio rebalancing, volatility harvesting