Are VIX Strategies a full-blown category?

The VIX futures contract was launched by the Chicago Board of Options Exchange back in 2004.  VIX, which stands for Volatility Index, shows the market’s expectation of the future 30-day volatility of the S&P 500.  The value of the VIX is constructed using implied volatilities of a wide range of S&P500 index options. While the VIX futures contract was launched in 2004, the popularity of the contract started exploding in 2011.  As volume in the market grew, more and more traders and CTAs started looking into how to incorporate the market into their trading strategies.

 

Over the last three to five years, there have been more and more CTAs popping up that have a volatility strategy as their core offering.  These strategies involve trading the VIX futures contract in a multitude of ways.  Here are some common strategies we have seen as core offerings:

 

  • Directional VIX Strategy: this strategy takes a directional position in VIX futures by going outright long or short the futures contract. It’s quite simple in nature and looks to predict volatility spikes and sell-offs.

 

  • Hedged VIX Strategy: This strategy involves taking a long or short position in the VIX futures contract and hedging that with an S&P position in the same direction. The hedge works because VIX and S&P are almost 90% inversely correlated.  The real “sauce” in this strategy is deciding whether to go long or short the VIX, and then deciding the ratio of S&P contracts to hedge with.

 

  • VIX Spread Strategy: This strategy involves trading calendar spreads in VIX futures. The strategy involves either going long or short one calendar month and then taking the opposite position in a different month.  These strategies are trying to capitalize in a market environment where the months are either in deep backwardation or deep contango.  They may also be exploiting the rapid decay of the volatility term structure.

 

  • VIX diversified Strategy: this strategy involves trading volatility in a myriad of ways. S&P options could be utilized, VStoxx (European volatility index) maybe traded against the VIX, and out right VIX positions may be taken.

 

These categories are very broad in nature and are by no means the proper way of categorizing VIX strategies.  The above categories are used by aiSource to separate the strategies when describing and offering them to our clients.  Below is an approved list of VIX CTAs that aiSource offers, and they are categorized into the above buckets:

 

 

CTA Name
Directional   VIX 
Hedged
VIX
VIX
Spreading
Diversified VIX
Pearl Capital Advisors
 
X
 
 
Coloma Capital Futures
 
X
 
 
Ravinia Investment Management
 
 
 
X
Typhon Capital Management (Proteus)
X
 
X
 
Red River Capital
X
 
 
 
Covenant Capital
X
X
 
 
Global Sigma Group Hedged Vol Strategy
 
X
X
 
Goldenwise Capital Management
 
 
 
X

 

 

Since VIX strategies are “new on the scene,” and can be complex to understand, they may not be a good fit for all clients.  While VIX strategies offer diversification for almost every portfolio, we feel a client should understand the risks/rewards involved before adding to their portfolio.