New White Paper Discusses Volatility as a Small Cap Portfolio Hedge

A new white paper from our partners over at Russell Indexes Research discusses the merits of using futures on the CBOE Russell 2000 Volatility Index (RVX) to hedge small cap risk.  In the paper “RVX futures as a hedge for small cap-specific risk” Barry Feldman covers volatility products that are currently available to hedge downside risk in equity portfolios and then goes on to compare using VIX futures and RVX futures to hedge a small cap focused portfolio.

Feldman uses the market activity in 2014 when there was a correction that hit small cap stocks more than large cap stocks to demonstrate long volatility exposure and as equity portfolio hedge.  He notes that RVX moved up in response to the weakness in the Russell 2000.  More significantly he points out that RVX moved higher relative to the large cap focused VIX as small cap stocks were under performing large cap stocks as a group.  The chart below comes from his paper with the line representing the relative premium for RVX compared to VIX.

RVX VIX Premium FTSE Russell

Feldman focuses on two periods of increased volatility based on weakness in the Russell 2000 during 2014.  He applies RVX and VIX hedges and notes in both periods the RVX hedge was effective as an equity portfolio hedging vehicle and was actually more effective than a comparable hedge using VIX futures.

To learn more about RVX and RVX futures or download Feldman’s paper click on the link below which takes you to the RVX microsite at CBOE –

Russell 2000 Volatility Microsite