Hanging tight with my VIX hedging strategy

I plan to maintain my short Barcalys Bank iPath S&P 500 VIX Short-Term Futures (VXX)  and long Barcalys Bank iPath S&P 500 VIX Mid -Term Futures (VXZ) strategy for the time being, because mid-term VIX futures (VXZ) were much less elevated relative to short-term VIX futures (VXX) throughout October, and I expect that to continue through November.

I found, however, that instead of (VXZ) providing the hedge that I expected during October, short-term and mid-term VIX futures continued to converge (i.e., VXX rose while VXZ fell). Therefore, I reduced the total exposure to this pair during the second half of October.

If the futures enter backwardation in November, with short-term VIX futures greater than mid-term VIX futures, then I will reverse the pair trade and go long VXX and short VXZ.

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The investments discussed are held in client accounts as of October 31, 2012. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.

  • Daniel Perez

    Robert, Your approach looks very interesting. I was wondering if you explain what took place from July to Oct 2011 with the sharp drawdown? Is there something you changed to not have that happen, or was there some anomaly in the market in those months? I know there is always risk and forward-looking statements, so it is not a question regarding what every investment method hits, namely a normal drawdown. It looks more like there was something fundamental to the strategy that did not work out over that period?