As discussed in my first and second blogs in this series, in my opinion, there is a compelling case for using volatility as a market hedge, by accessing futures on the CBOE Volatility Index (VIX). However, I believe VIX futures are most effective as short-term hedges. Since it is not prudent to maintain a static allocation in VIX futures given the significant drag on performance created by the negative roll return, the key is to determine when and how much to invest in VIX futures.
Most investors typically do not dedicate a significant amount of time to develop a market hedging strategy. As the below graph indicates, investors have tended to pull the most money out of VIX futures products right before the market experiences a significant correction. It is important to note that hedging strategy is sophisticated and complex so investors should always discuss with a financial advisor before deciding when to add a market hedge.
Thus, investors continue to look for an investment that has the ability to intelligently harness the potential of VIX futures. The PowerShares S&P 500 Downside Hedged ETF (PHDG) tracks a rules-based index strategy that dynamically rotates between the S&P 500 and VIX futures with a stop-loss mechanism that, if triggered, will move the fund to a 100% cash position. Learn more.
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