There’s an interesting disconnect right now between the qualitative narrative about Greece, the euro, and China, and one quantitative estimate of how aggressively you should be hedged. The narrative is about as gloomy as it gets: everyone is talking about the new German empire (Soros), the “inevitable” Grexit, etc., and mediocre U.S. economic data. But the VXH strategy, while no longer at its lowest setting, is still not signalling the need for large hedges.
I developed the VIX Portfolio Hedging (VXH) strategy a few years ago to satisfy the demand among some clients for a cost-effective way to hedge their stock portfolios. It allocates hedging capital dynamically to VIX futures. Here’s the last year’s worth of allocation signals, with the y axis removed to protect clients.
At the start of 2012, the signal was basically at zero, indicating the minimum allowed allocation to VIX futures. The strategy spent the whole first quarter at that minimum threshold, which was great for clients since it saved a lot on hedging costs as the market chugged higher. There was a swing higher in late April that quickly reversed, and then we’ve had another series of signal increases over the last few weeks. But it’s interesting that this strategy – which is fairly sensitive to changes in the market environment – is nowhere near the levels we saw last August.
That could change, of course, if implied and realized volatility keep rising.