Man AHL created the AHL Explains video series in an effort to demystify quantitative investing through an engaging and user-friendly medium. The videos seek to bring essential quantitative investing concepts to life through illustrations and graphics, and explain the key concepts in futures trend following in a simple and accessible way.
Volatility scaling is one of the main things you need to understand in order to understand momentum trading, according to Man AHL. This video uses a simple example involving one market and a daily trading system to explain the concept, which involves attempting to neutralize the impact of market volatility on the system’s profitability. Of course, the equation uses implied rather than realized volatility, since it’s attempting to forecast events that haven’t happened yet. The actual difference between implied and realized volatility is therefore an element of “risk” in momentum-based systems.
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