An August 28th news article at http://blogs.barrons.com stated —
“First Trust To Launch VIX ‘Tail Hedge’ Fund. The rise of volatility trading products continues. First Trust Advisors is set to launch what it’s calling the First Trust CBOE S&P 500 VIX Tail Hedge Fund on Thursday … The fund will trade under the ticker VIXH. Here’s the link to the prospectus. …” (link)
This CBOE blog is for informational purposes, and CBOE does not do solicitations or recommendations for exchange-traded funds.
Please read the fund’s prospectus which notes that “The Fund seeks investment results that correspond generally to the price and yield, before the Fund’s fees and expenses, of an equity index called the CBOE VIX Tail Hedge Index.”
CBOE VIX TAIL HEDGE INDEXSM (VXTHSM)
The VXTH Index tracks the performance of a hypothetical portfolio that –
- Buys and holds the performance of the S&P 500® index (the total return index, with dividends reinvested), and
- Buys one-month 30-delta call options on the CBOE Volatility Index® (VIX)®. New VIX calls are purchased monthly, a procedure known as the “roll.” The weight of the VIX calls in the portfolio varies at each roll and depends on the forward value of VIX, an indicator for the perceived probability of a “swan event”.
- The weights are determined according to the schedule below and the weights applied at a particular roll date can be seen by opening the VXTH Monthly Roll Spreadsheet at http://www.cboe.com/VXTH/
PAPER ON HEDGING AND TAIL RISK MANAGMENT
Key Tools for Hedging and Tail Risk Management is a paper by Asset Consulting Group (February 2012). Key highlights from the paper include:
- Tail Risk Over 25 Years: Since mid-1986 the worst monthly declines for select indexes include: down 28.2% for the S&P GSCI Index, down 21.5% for S&P 500, down 20.2% for MSCI EAFE, and a decline of only 8.6% for the CLL Index (Exhibit B).
- Risk and Diversification in 2008: Changes for indexes in 2008 – S&P 500® down 37.0%; two indexes with options and stocks – CLL Index down 23.6% and VXTH Index down 19.3 (Exhibit A).
- Lower Volatility: The CLL has incurred about 70% of the volatility of the S&P 500 over the last 26 years. Select portfolios with the VXTH had less volatility than the S&P 500 over the last 70 months (Exhibits C, F, and O).
More papers and benchmark index information are available at www.cboe.com/benchmarks
Two of the Exhibits from the paper are below.
LINKS TO ADDITIONAL INFORMATION
Volatility indexes www.cboe.com/volatility
CBOE Volatility Index® (VIX®) (with put-call ratios, CFE, charts, bibliography, etc.) www.cboe.com/VIX
CBOE Risk Management Conference in Ireland – Sept. 5 – 7 2012 www.cboermc.com/Europe
Asset Consulting Group (ACG) is an investment consulting firm which provides a full scope of investment advisory services to a select group of clients. The Chicago Board Options Exchange® (CBOE®) provided financial support for the ACG paper. The CBOE S&P 500 indices are designed to represent proposed hypothetical strategies. The actual performance of investment vehicles such as mutual funds can have significant differences from the performance of the hypothetical indices. Like many passive indices, the indices do not take into account significant factors such as transaction costs and taxes. Investors attempting to replicate the indices should discuss with their advisors possible timing and liquidity issues. Past performance does not guarantee future results. Standard & Poor’s®, S&P®, and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC and are licensed for use by the CBOE. CBOE and Chicago Board Options Exchange are registered trademarks of the CBOE, and the CBOE indices are servicemarks of the CBOE. CBOE calculates and disseminates the indices. The methodology of the indices are owned by CBOE and may be covered by one or more patents or pending patent applications. The information contained in this report is based on information obtained by ACG from sources that are believed to be reliable. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.