Hedging with the VIX ETF: Effectiveness in Tail and Drawdown Reduction

TY - UNPB

T1 - Hedging with the VIX ETF: Effectiveness in Tail and Drawdown Reduction

AU - Cheung, Wing

PY - 2010

Y1 - 2010

N2 - Volatility as an asset class has been widely considered as an equity portfolio hedging instrument owing to its negative correlation with the equity markets, which tends to be particularly strong in downside markets. Since its launch in June 2010, the S&P 500 VIX Source ETF (the “VIX ETF”) offers institutional investors a simple way of gaining volatility exposure. It is a liquid and flexible vehicle for hedging with minimal credit risk. We examine the effectiveness of using the VIX ETF as a hedge instrument from the perspective of: • Return distribution revision; • Tail loss reduction; • Drawdown distress relief; and • The existence of a performance-enhancing hedging strategy.

AB - Volatility as an asset class has been widely considered as an equity portfolio hedging instrument owing to its negative correlation with the equity markets, which tends to be particularly strong in downside markets. Since its launch in June 2010, the S&P 500 VIX Source ETF (the “VIX ETF”) offers institutional investors a simple way of gaining volatility exposure. It is a liquid and flexible vehicle for hedging with minimal credit risk. We examine the effectiveness of using the VIX ETF as a hedge instrument from the perspective of: • Return distribution revision; • Tail loss reduction; • Drawdown distress relief; and • The existence of a performance-enhancing hedging strategy.

M3 - Working paper

BT - Hedging with the VIX ETF: Effectiveness in Tail and Drawdown Reduction

PB - Nomura International plc

ER -