Using VIX to Dynamically Hedge Portfolio Risk

GIS Business ◽  
1970 ◽  
Vol 13 (3) ◽  
pp. 15-22
Author(s):  
Richard Cloutier
Keyword(s):  
Asset Allocation ◽  
Market Timing ◽  
Investment Strategy ◽  
Market Risk ◽  
Portfolio Risk ◽  
Dynamic Hedging ◽  
Hedging Strategy ◽  
Tactical Asset Allocation ◽  
Asset Class ◽  
Timing Strategies

Many investors accept buy and hold as their long-term investment strategy. However, during periods of heightened risk, staying disciplined can be problematic. Alternatively, market timing appeals to our emotions but is very difficult to employ successfully. Between these two extremes lies tactical asset allocation, where limited variances are allowed to take advantage of market conditions. Dynamic hedging is a form of tactical asset allocation. Instead of relying on future predictions of asset class returns, dynamic hedging strives to reduce portfolio risk when market risk is elevated. This paper presents a dynamic hedging strategy developed to accomplish this goal. It uses VIXs normal trading range to assess market risk. When VIX trades above its normal trading range and the upper Bollinger band, the dynamic hedging strategy is applied. The result is that portfolio risk is lowered when market risk is extreme. The application of this strategy provides better returns, lower volatility, and better downside protection than a strategic buy and hold allocation. It also avoids the deployment problems associated with market timing strategies.

scholarly journals A tactical asset allocation strategy that exploits variations in VIX

2017 ◽  
Vol 14 (1) ◽  
pp. 27-34
Author(s):  
Richard Cloutier ◽  
Arsen Djatej ◽  
Dean Kiefer
Keyword(s):  
Asset Allocation ◽  
Market Timing ◽  
Allocation Strategy ◽  
Market Conditions ◽  
Volatility Index ◽  
Tactical Asset Allocation ◽  
Asset Classes ◽  
Strategic Allocation ◽  
Timing Strategies ◽  
Daily Returns

Buy and hold strategies make staying disciplined difficult for investors, especially given the variability of returns for different asset classes/strategies during divergent market conditions. Market timing strategies, on the other hand, present significant theoretical benefits, but in reality these benefits are difficult to obtain. Tactical asset allocation, where limited deviations from the strategic allocation are allowed permits the portfolio manager to take advantage of market conditions fits between these two extremes. The authors correlate daily returns for each of eighteen separate asset classes typically used in diversified institutional portfolios and daily closing values of the VIX (the ticker symbol for the Chicago Board Options Exchange Volatility Index). This information is used to select those classes whose returns are most responsive to the level of the VIX. Portfolio allocations for eight selected asset classes are revised depending on the level of the VIX at the daily close of the market. The portfolio is rebalanced on the business day following the day the VIX hits the trigger value. The VIX tactical allocation overlay yields an increase in return over the buy and hold portfolio of approximately 38 basis points. The authors conclude that the tactical asset allocation strategy based on the level of VIX provides a higher return than the neutral buy and hold allocation with a higher Sharpe ratio and lower volatility.

scholarly journals Market Timing For active Asset Allocation: A Discrete Regression Model Approach

2011 ◽  
Vol 11 (1) ◽  
pp. 125
Author(s):  
Glen A. Larsen, Jr. ◽  
Gregory D. Wozniak
Keyword(s):  
Regression Model ◽  
Asset Allocation ◽  
Market Timing ◽  
The Other ◽  
Portfolio Performance ◽  
Empirical Results ◽  
Portfolio Strategies ◽  
Fixed Weight ◽  
Asset Class ◽  
Model Approach

A discrete regression model (DRM) approach to timing the asset class markets for stocks, bonds, and cash in active asset allocation is presented. The technique involves investing in the asset class whose return is predicted to exceed the other asset class return after observing a sequential signal of estimated probabilities. The empirical results show that the DRM approach provides enhanced portfolio performance when compared to more passive fixed-weight portfolio strategies.

scholarly journals Using an inflation-augmented price-earnings ratio to guide tactical asset allocation

2011 ◽  
Vol 12 (4) ◽  
pp. 412-428
Author(s):  
Adrian Saville
Keyword(s):  
South Africa ◽  
Asset Allocation ◽  
Equity Returns ◽  
Price Inflation ◽  
International Evidence ◽  
Tactical Asset Allocation ◽  
Price Earnings Ratio ◽  
Asset Class

Asset allocation plays a central role in determining investment outcomes, and available evidence shows that portfolio results can be enhanced through tactical asset allocation if managers use the simple price-earnings ratio as a predictor of equity returns. Recently, some international evidence has emerged which shows that, by augmenting the price-earnings metric with information about consumer price inflation, further enhancements can be achieved in tactical asset allocation.  This study reviews these arguments  as they apply to South Africa, and finds that an inflation-augmented price-earnings ratio is more successful in forecasting equity returns than is the simple price-earnings ratio.  Moreover, the metric is found to be significant in explaining relative asset class returns. On a risk-adjusted basis, however, the tool fails to improve the portfolio results when compared to a buy-and-hold strategy. 

scholarly journals Do the Israeli Provident Funds have the Ability to Time the Bond and Stock Markets? An Analysis across Alternative Investments

2017 ◽  
Vol 6 (2) ◽  
pp. 169
Author(s):  
Ofer Arbaa ◽  
Eva Varon
Keyword(s):  
Asset Allocation ◽  
Mutual Fund ◽  
Market Timing ◽  
Future Market ◽  
Fund Managers ◽  
Portfolio Holdings ◽  
Early Return ◽  
Timing Ability ◽  
Asset Class ◽  
Timing Decisions

This paper investigates whether Israeli fund managers possess market-timing ability across asset classes over time, using 15 years of monthly data from the Israeli provident funds.  We apply three methodologies based on return based and portfolio holdings approaches. Most of the early return-based timing methods and the most recent portfolio holdings measures suggest that U.S. mutual fund managers do not possess equity timing ability. Our study is the first to test this evidence on multi- asset class provident funds in the Israeli market and compare the timing ability of fund managers in each asset class according to different approaches. We introduce an alternative holdings method that combine the asset allocation theory with that of market timing and use "excess policy" holdings data to predict future market returns.  In addition, previous studies mostly ignore the contribution of other instruments to timing decisions, which may cause any conclusions about managers' timing decisions to be incomplete. Hence, we test equity market timing with respect to all markets using a multiple market index model in the holdings approach. In line with previous research, our empirical results indicate significantly negative market timing in domestic equities according to all the measures used. On the other hand, provident fund managers on average seem to display some timing ability for government bonds.

scholarly journals KINERJA PENGELOLAAN DANA PADA PASAR MODAL INDONESIA

2008 ◽  
Vol 10 (4) ◽  
Author(s):  
Yuyun Istavirti ◽  
Dr. Andi M. Alfian Parewangi ◽  
Dr. Ruslan Prijadi
Keyword(s):  
Asset Allocation ◽  
Mutual Fund ◽  
Market Timing ◽  
Selection Strategy ◽  
Fund Manager ◽  
Data Set ◽  
Financial Investment ◽  
Allocation Policy ◽  
Tactical Asset Allocation ◽  
Security Selection

The mutual fund is a fast growing, flexible and sizely attainable product, hence make it as favourable choice for the investors. As in other developing countries, however, the management of the fund invested in mutual fund is done by pointed fund manager. This paper raises and answers the question of how efficient the fund management is. This paper ustilizes the decomposition return model on the monthly data set from 2002-2006 in Indonesia. The model derived, enable us to trace and decompose the management performance into (i) the allocation policy skill, (ii) the security selection skill and (iii) the market timing strategy or the tactical asset allocation abilty.The model estimation result shows significant management capabilities on allocating the fund into suitable asset class. We record that the best asset allocation policy was on February 2002, June 2004, August 2004 and February 2006. Inline with this, another result shows the negatif contribution of the short term-tactical asset allocation as conformed by several previous studies; Treynor-Mazuy (1996), Wardhani (2003), and Henriksson (1984) among others. There is an exception for February 2006 where a successful market timing strategy contributed an additional 7.34% return. The security selection strategy is confirmed to have a positive and significant impact on the mutual fund performance. During the observation period, the best security selection strategy was achieved on February, March and July 2002, September 2003, and March, October, and December 2005. For these certain period, the security selection activities gave more than 2% additional monthly return.The policy implication is straightforward; a more intensively monitoring on the implementation of the planned asset allocation to give a safer financial investment environment for the investors. This paper also suggest the investment manager to provide a sufficient information about the portfolio’s risk profile. Our quantitative description has shown a large varieties both on return and risk across the mutual fund manager showing their varied risk taking behaviour, on which the investor has a right to know.JEL Classification: H54, G11, G31, O16Keywords: Mutual fund, asset allocation, security selection, market timing, period specific estimation, financial investment

Dynamic Asset Allocation Techniques

2009 ◽  
Vol 15 (3) ◽  
pp. 573-655 ◽  
Author(s):  
S. Jarvis ◽  
A. Lawrence ◽  
S. Miao
Keyword(s):  
Asset Allocation ◽  
Investment Strategy ◽  
Trading Strategies ◽  
Investment Strategies ◽  
Dynamic Asset Allocation ◽  
Dynamic Investment ◽  
Tactical Asset Allocation ◽  
Relationship Of ◽  
The Relationship

ABSTRACTInvestment strategy is often static, punctuated by infrequent reviews. For most long-term investors, this practice results in large risks being taken that could otherwise be managed with a more dynamic investment policy. The bulk of this paper is aimed at analysing and describing two multi-period investment strategy problems — in order to derive potential dynamic strategies. Along the way, we show how static investment strategies can fail to deliver an investor's long-term objectives and describe the relationship of our work to other areas of the finance literature. This paper does not cover trading strategies such as Tactical Asset Allocation.This paper sets out two main approaches to the multi-period problem. The first approach optimises a utility function. The second approach uses partial differential equation (PDE) technology to optimise a target statistic (in this case, TailVaR) subject to return and long-only constraints.

PRIX – A risk index for global private investors

2017 ◽  
Vol 18 (2) ◽  
pp. 214-231 ◽  
Author(s):  
Sebastian Stöckl ◽  
Michael Hanke ◽  
Martin Angerer
Keyword(s):  
Asset Allocation ◽  
Risk Measures ◽  
Risk Measure ◽  
Risk Index ◽  
Portfolio Risk ◽  
Dynamic Asset Allocation ◽  
Content Type ◽  
Private Investor ◽  
Asset Class ◽  
Private Investors

Purpose The purpose of this paper is to create a universal (asset-class-independent) portfolio risk index for a global private investor. Design/methodology/approach The authors first discuss existing risk measures and desirable properties of a risk index. Then, they construct a universal (asset-class-independent) portfolio risk measure by modifying Financial Turbulence of Kritzman and Li (2010). Finally, the average portfolio of a representative global private investor is determined, and, by applying the new portfolio risk measure, they derive the Private investor Risk IndeX. Findings The authors show that this index exhibits commonly expected properties of risk indices, such as proper reaction to well-known historical market events, persistence in time and forecasting power for both risk and returns to risk. Practical implications A dynamic asset allocation example illustrates one potential practical application for global private investors. Originality/value As of now, a risk index reflecting the overall risk of a typical multi-asset-class portfolio of global private investors does not seem to exist.

scholarly journals Style Analysis: Asset Allocation and Evaluation of Sharia Equity Fund Performance

2020 ◽  
Vol 8 (2) ◽  
pp. 46
Author(s):  
Opi Prisilia ◽  
Acong Dewantoro Marsono
Keyword(s):  
Asset Allocation ◽  
Investment Strategy ◽  
Style Analysis ◽  
Equity Fund ◽  
Actual Performance ◽  
Equity Funds ◽  
Asset Class ◽  
Characteristic Style ◽  
Almost All ◽  
Passive Strategy

The purpose of this research is to analyze the characteristic style of sharia equity funds such as asset allocation, investment strategy, and evaluation of its performance. The analysis technique used in this study is return based style analysis by observing ten asset class factor and eight of sharia equity funds in Indonesia. The results found that sharia equity fund in Indonesia allocates funds to the Sharia shares in almost all asset class factor with passive strategy, but the actual performance has not been able to outperform its style performance. Only one from eight Equity funds can outperform its style by using a more passive strategy compared to other equity funds. Its result indicates that almost all sharia equity funds in Indonesia do not choose the correct investment strategy style.

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