Hedging Inflation Risk: A Nowcast Approach Under Risk Target Constraints

RavenPack’s latest white paper proposes a multi-asset allocation strategy for hedging against inflation, which maximizes the portfolio's mean-variance criterion by investing in equities, commodities, and bonds based on inflation nowcasts. Backtested against the US equity market, a 10-year US government bond, and six conventional commodity indexes, the proposed strategy outperformed the S&P 500® in terms of return, volatility, Sharpe ratio, and maximum drawdown.

Key Results:

• The proposed strategy can outperform the S&P 500 in terms of return, volatility, Sharpe ratio, and maximum drawdown.
• Our approach delivers impressive real and gross Sharpe ratios of 1.04 and 1.25 (gross), and 0.97 and 1.22 (gross) for headline and core CPI nowcasts, respectively, while catering to risk-neutral investor preferences.
• The risk target approach allows for effective stabilization of portfolio volatility around a desired target level.
• Our risk control approach yields remarkable results:

When targeting volatility levels is		2%	5%	8%
We achieve	Low Realized Volatility Levels	1.9%	4.6%	7.6%
	High Sharpe Ratios	2.40%	1.68%	1.46%
	Annualized Turnover	132%	300%	468%

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