Understanding your hedge is key
Chris McKhann | [email protected]
Your hedge shouldn't be wrapped up with a bow and be a surprise when you open it. You should know exactly what you are getting.
So I was surprised when I saw an article this week about buying the iPath S&P 500 VIX Short-Term Futures Note (VXX) as a hedge without any explanation of what it actually is. Most of you already know this story, but if anyone hasn't, then it is worth the writing.
The VXX is a volatility hedge, which means that in theory it will rise when the market sells off sharply. And it can go up a lot, as a chart will show, but a longer-term look will also show a dismal performance. The exchange-traded note finished yesterday down 2.04 percent to $14.16, a new all-time closing low. But it started in February of 2009 at $6,400 (after two reverse splits).
Some talk mention it as a way to play the low levels of the CBOE Volatility Index, but the VXX doesn't "own" the VIX. It does own the two nearest-month VIX futures, which are usually higher than the spot volatility index. If all that makes your head spin, you shouldn't own the VXX.
This isn't a bad time to buy some extra hedges as a gift to your portfolio. Just be sure that it doesn't come in a surprise package.