|Description||James Doran, Portfolio Manager at Implied Capital, LP will be joining us to discuss holding volatility in a portfolio.
The ability to hedge market downturns without sacrificing upside returns has long been sought by investors. We examine alternative methods of hedging the S&P 500 with assets that mimic the VIX index in hopes of taking advantage of the asymmetric relationship between volatility and returns. If the VIX were directly investable, adding VIX to an S&P 500 portfolio results in significantly improved performance over the buy-and-hold index portfolio. Given the inability to directly trade VIX, we consider a number of positions which may be utilized to mimic VIX holdings. VIX futures are too expensive to provide an effective hedge and results in negative abnormal returns. VIX calls, while a relatively new product, provide encouraging initial performance as a portfolio addition or overlay. Alternatively, we deconstruct VIX to find the relevant S&P 500 options which drive VIX movement. A synthetic VIX portfolio is then formed using S&P 500 options and this position captures returns similar to the VIX index, but is still subject to extreme crash risk. This shows the difficulty in capturing the positive skewedness, or non-linear response of VIX to S&P 500 movements.Read More »|