Hedging Inflation Risk: A Nowcast Approach Under Risk Target Constraints

March 10, 2023

Our multi-asset allocation strategy based on inflation nowcasts and RavenPack sentiment analytics outperforms the S&P 500 and stabilizes volatility. With real Sharpe ratios of up to 1.25 and a risk control approach, it delivers a compelling inflation hedge for investors.

Hedging Inflation Risk image

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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