Research approves active management
Active management is vital within volatility strategies, according to recent research released by van Eyk.
The paper, entitled 'Brave New World: Assessing Volatility Strategies for Portfolio Construction,' looked at a range of asset protection strategies for volatile markets that are based on the VIX volatility index, and concluded that they needed to be actively managed to ensure investors could reduce their losses when markets fell without sacrificing overall returns.
Commenting on a growing interest in investment strategies which sought to reduce the impact of market volatility or even exploit it for the benefit of investors, the research also warned that simply being 'long volatility' was unlikely to produce success.
This, it said, was due to the high cost of buying and holding VIX futures.
"Volatility strategies that systematically exploit the alpha inherent in VIX options markets, or those that access VIX futures exposure when holding costs are not prohibitively expensive, can be combined with absolute shares funds to produce superior returns when compared with long-only equity market exposure," the research concluded.
Superior returns, it said, could be achieved from a specific combination of long-volatility strategies, volatility-arbitrage strategies and absolute return strategies, including a long-only equities strategy, over the long term.
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