First Trust will offer 'tail hedge' VIX fund
Chris McKhann | firstname.lastname@example.org
VIX funds, which are based on the volatility index's futures, have been wildly successful, even if their performance has been, well, volatile. So it is no surprise that First Trust has jumped on the new CBOE VIX Tail Hedge Strategy Index (VXTH), which is a portfolio that tracks the S&P 500 with the addition of VIX calls.
The index buys one-month 30 delta calls and rolls monthly. The allocation to VIX calls runs from 0 to 1 percent, no calls are bought when the VIX is below 15 or above 50. The allocation is 1 percent between 15 and 30 and 0.5 percent from 30 to 50.
This is done on the premise that "black swan" events don't happen when the VIX is very high or very low. It is an interesting idea, but obviously not a new one. The dynamic allocation is something that is becoming increasingly common, but it does beg this question: Ju because no black swans have come with the VIX below 15 or above 50, will it not happen in the future?
Performance will lag when the market is running higher, but the VIX calls will take the sting out of most severe selloffs. I need to look at performance over more specific time frames, but it strikes me that anyone who understands the strategy probably has enough understanding to do it themselves without paying the fee. Dynamic allocations make sense, but I believe that there are better rules than those used here.