SEC Scrutinizing Exchange Traded Notes
(Dec 2013)
Risk.net is reporting that the Office of Capital Markets Trends of the Securities and Exchange Commission (SEC) is looking into the details of exchange traded notes (ETNs). The office, headed by Amy Starr, is looking into the fees and the disclosure of risks and formulas used to determine ETN indicative values according to statements made by Starr at the Structured Products conference in Washington, DC on December 10.
ETNs have been a frequent subject on the blog and regulators have issued...
Variable Annuity Fees Linked to the VIX -- Part II
(Nov 2013)
In our last post, we discussed a whitepaper that proposed linking the fees in a variable annuity to the CBOE Volatility Index (VIX). That paper ran a simple backtest of a variable annuity fee tied to the VIX over the period from 1990-2012, assuming certain parameters, and then compared the result to a fixed fee annuity over the same period. We have replicated their approach between January 1990 and January 2013 and found that not only are the fees and ending account values comparable, but so...
Variable Annuity Fees Linked to the VIX -- Part I
(Nov 2013)
We've discussed the CBOE Volatility Index -- known as the VIX-- many times before. Essentially, the VIX is a very complex calculation of the expected future variance of the S&P 500 (see the full calculation methodology), and is popularly known as the 'investor fear gauge'. The VIX is not a tradeable asset, but there are VIX options and futures contracts, and those contracts serve as the basis for several VIX-related exchange-traded products (TVIX, XIV, VXXto name a few). The VIX is very...
How Does VolDex Stack Up to the VIX?
(Nov 2013)
We've talked a lot about the idea of using volatility to hedge equity exposure. The basic finding, from our research work and that of others, is that the CBOE Volatility Index (VIX) hedges the S&P 500 fairly well. Unfortunately, the VIX is not investable, but is a complicated calculation based on a large strip of options contracts -- i.e., contracts of varying moneyness. Proxies for the VIX, such as rolling VIX futures strategies, are much worse hedges and have a number of problems that make...
Illiquid ETFs and SEC Market Maker Incentives
(Sep 2013)
There is now nearly $1.5 trillion invested in exchange-traded products (ETPs) in some 1,400 exchange-traded funds and exchange-traded notes. However, not all of that huge sum is distributed evenly. Some funds, like SPY, have huge assets under management, while many others struggle to top $10 million. Often, issuers will close lightly-traded ETPs (leading to substantial turnover each year), but if they don't, the market price of an ETP can often deviate from the net asset value of its...
Why Do Volatility ETPs Reverse Split?
(Sep 2013)
We still get a lot of questions about VXX, TVIX, and all of the other VIX-related exchange-traded products(ETPs). We've talked before about the persistent loss of value due to negative roll yield, as well as issues surrounding TVIX's suspension of share creations. We've also talked about some of the newer volatility products that attempt to mitigate some of the issues with the older generation of products. We've also analyzed whether VIX-based ETFs could serve as a hedge to equity...
VelocityShares' New Volatility ETFs
(Jul 2013)
You've heard it here before: hedging equity exposure with volatility derivatives is very tricky.
While the CBOE Volatility Index (VIX) and the S&P 500 are negatively correlated suggesting a possible hedging opportunity, you cannot invest in the VIX itself, you have to invest in derivatives (futures or options) linked to the VIX. The simple fact is that this indirect exposure to the VIX does not behave like the VIX itself, making it in the end a rather poor hedge to equities .
But issuers of...
Options Strategies Embedded in Exchanged Traded Products
(May 2013)
In theory, exchange traded products (ETPs) can be linked to almost any underlying asset, including derivatives. While many ETPs are linked to portfolios of bonds or stocks, some are linked to portfolios of futures contracts, which we have discussed at length before. Bill Luby at VIX and More has written a couple posts on ETPs that are linked to portfolios of options, which are gaining some traction with investors. As usual, we greatly enjoyed Bill's posts and thought we'd explain some of the...
Persistence and Mean Reversion in VIX Rolling Futures Indexes
(Mar 2013)
In our last post we followed up on Jason Voss's discussion of the Hurst exponent as a measure of persistence or mean reversion in market data. We compared the Hurst exponents of the S&P 500 to that of the VIX index, and found that the S&P 500 is largely a random signal (Hurst exponent near 0.5) but that the VIX exhibits characteristics of a 'switching' or mean reverting signal (a Hurst exponent between 0 and 0.5).
Much has been made of VIX mean reversion in the financial blogosphere. One idea...
