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Tim Edwards
November 30, 2015
500%
400%
300%
200%
100%
0%
11-2006
11-2007
11-2008
11-2009
11-2010
11-2011
11-2012
11-2013
11-2014
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.
Live Performance
S&P 500 VIX Short-Term Futures Index: Jan 2009 Nov 2015
-99.67%
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.
For Financial Professionals. Not for Public Distribution. PROPRIETARY.
Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
Outline
Investable Volatility
Features of volatility as a hedge
Negative Correlation
S&P 500 VIX Short-Term Futures Index: Live Performance Jan 2009 Nov 2015
100,000,000
10,000,000
3000
1,000,000
100,000
10,000
1,000
100
300
Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep
2009 2009 2009 2010 2010 2011 2011 2011 2012 2012 2013 2013 2014 2014 2014 2015 2015
S&P Short Term VIX Futures (Left Axis, Logarithmic)
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.
Dates
Event
Index
2006
10 May - 14 Jun
+ 61%
2007
19 Jun - 16 Aug
+ 97%
2008
19 Sep - 19 Nov
Lehman Bankruptcy
+ 264%
2010
23 Apr - 20 May
Flash Crash
+ 87%
2011
22 Jul - 22 Sep
+ 141%
2012
26 Mar - 18 May
+ 47%
2013
07 May - 24 Jun
Taper tantrum
+ 26%
2014
18 Sep - 15 Oct
+ 58%
2014-5
05 Dec - 15 Jan
+ 40%
2015
10 Aug - 01 Sep
+ 96%
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Table is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.
For Financial Professionals. Not for Public Distribution. PROPRIETARY.
Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
Convexity
S&P 500 VIX Short-Term Futures Index versus S&P 500 (Dec 2005 Nov 2015)
S&P Short-term VIX Futures Index TR
21-trading day % change
200%
150%
100%
50%
0%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
Ave
Max
1.0
0.9
0.8
0.5
0.1
-0.3
-0.5
-0.8
1.0
0.9
0.9
0.9
0.5
0.2
0.2
-0.7
Source: S&P Dow Jones Indices LLC. Data as of November 30, 2015. All index performance considered was total return index in USD. Table provided for illustrative purposes. Past performance
is no guarantee of future results. These charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun
2009 2009 2010 2010 2011 2011 2012 2013 2013 2014 2014 2015
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares. Data as of November, 2015. Chart is provided for illustrative purposes. Past performance is no
guarantee of future results.
10
11
HY Returns
S&P 500 VIX Short-Term Futures Index: years & quarters (Dec 2006 Nov 2015)
Full Year Total Return
Q1
Q2
Q3
Q4
2007
43%
0%
-3%
27%
16%
2008
126%
12%
-22%
23%
109%
2009
-65%
17%
-40%
-27%
-32%
2010
-72%
-37%
49%
-45%
-46%
2011
-10%
-21%
-29%
157%
-38%
2012
-76%
-50%
-16%
-35%
-14%
2013
-66%
-35%
0%
-27%
-27%
2014
-26%
-1%
-32%
10%
1%
-41%
-18%
-21%
28%
-29%
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Table is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.
12
Short Volatility
250%
200%
150%
0%
01-2009
01-2010
01-2011
01-2012
01-2013
01-2014
01-2015
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Hypothetical short position does not reflect transaction costs,, borrowing costs and is not intended to
reflect a realistic investment strategy. Chart is provided for illustrative purposes only. Past performance is no guarantee of future results.
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150
100
50
0
Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun Jan Aug Mar Oct May
2006 2006 2007 2007 2008 2008 2009 2010 2010 2011 2011 2012 2013 2013 2014 2014 2015
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.
14
15
Contango: Example
VIX Futures Term Structure as of 4th November, 2013
20
19
18.6
18
19.0
19.3
19.6
18.1
17
17.5
16
16.5
15
15.1
14
14.0
13
12
12.9
Spot Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14
Source: CBOE. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.
16
Demand for
Short VIX
Futures
Major
Event?
Reversion
to mean?
VIX
Future
No
Change?
Long-Term
Average
Arbitrage
Channel
Always > 0
Source: S&P Dow Jones Indices LLC. Provided for illustrative purposes only.
Next VIX
Future
= Previous Future
expected change
demand premium
subject to arbitrage
bounds
Demand for
Long VIX
Futures
17
1.00
VIX Index
0.90
0.87
0.82
0.80
0.86
0.64
0.60
0.60
0.46
0.40
0.20
0.02
0.00
1 Day
1 Month
1 Quarter
1 Year
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. 1st to 2d Futures Contango is the average percentage difference taken over the performance measurement period between the then-current first and second monthly future from expiry. Performance is total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of
future results.
For Financial Professionals. Not for Public Distribution. PROPRIETARY.
Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
18
19
Linear Regression
Historical 1st & 2nd VIX Futures Prices, Daily (Jan 2009 Nov 2015)
60
50
y = 0.9336x + 2.5006
40
2nd Future 30
20
10
0
0
10
20
30
Front Future
40
50
60
Source: CBOE. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.
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Consequences of Linearity
VIX Futures as current mean reversion premium
F2 = 0.9333 F1 + 2.5
= F1 + (1/15)*( 20 F1) + 1.14
Equation describes mean reversion to 20 (at 1/15 per month) plus 1.14 premium
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Reality Check
S&P 500 VIX Short Term Futures Index performance interpreted
Total return January 30, 2009 to November 17, 2015 of -99.67%
VIX from 44.84 to 18.84 (fall of 58%) over the same period
Adjusted performance of -99.22%, equivalent to -5.78% per month
-5.78% x 21 (average VIX Futures price) = 1.20 VIX points (vs 1.14 estimated)
Sources: S&P, CBOE. Past performance is no guarantee of future results.
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Historical Premium
Approximation to the premium in near VIX futures
6
4
2
0
-2
-4
-6
-8
-10
Feb
2006
Feb
2007
Feb
2008
Feb
2009
Feb
2010
Feb
2011
Feb
2012
Feb
2013
Feb
2014
Feb
2015
Model-implied premium
Source: S&P Dow Jones Indices LLC, CBOE. Data as of November, 2015. Model implied premium is a trailing 21-day average of the difference between the price of the then-current 2nd VIX
Future and that approximated by the model, i.e. 87.5% of the then-current 1st VIX Future, plus 2.5. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.
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3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares. Data as of November, 2015. Chart is provided for illustrative purposes. Past performance is no
guarantee of future results.
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3.5
3
3.0
2.5
2.0
1.0
1.5
0.0
-1.0
-2.0
0.5
-3.0
Jan Sep May Jan Sep May Jan Sep May Jan Sep
2009 2009 2010 2011 2011 2012 2013 2013 2014 2015 2015
Model-Implied Premium (Left Axis)
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares as of November 2015. Chart is provided for illustrative purposes. Past performance is no
guarantee of future results.
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Conclusions
VIX Futures indices
Potentially attractive hedging properties; yet poor performance 2009-2015
26
THANK YOU
Contact Us
Tim Edwards, PhD
tim.edwards@spdji.com
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PERFORMANCE DISCLOSURE
The S&P 500 VIX Short Term Futures Index and the S&P 500 Mid-Term Futures Index were launched on December 22, 2008; The S&P 500 VIX Short Term Futures Inverse Daily Index was
launched on August 5th, 2012. All information presented prior to the launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are
based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.spdji.com. It is not possible to invest directly in
an index.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first day for which there is a calculated value (either live or
back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index
are first considered live: index values provided for any date or time period prior to the indexs Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date
by which the values of an index are known to have been released to the public, for example via the companys public website or its datafeed to external parties. For Dow Jones-branded indicates
introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed Date of introduction) is set at a date upon which no further changes were permitted to be made to the
index methodology, but that may have been prior to the Indexs public release date.
Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the
back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at
www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects the application of the index
methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors
related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect
actual performance.
The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and
performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the
Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to
be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of
1.5% was imposed at the end of the period on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual
1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2% (or US $27,200).
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is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past
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