I have been thinking more about overall portfolio allocation recently - especially as bonds have such poor expected future returns (return-free risk?).
I have been mulling whether spread betting offers opportunities to retail investors such as long-short equity strategies, to find alternative non-extortionate hedges. So far I remain put off by the finance costs of spread-betting. .
However the following got me thinking http://www.thinknewfound.com/wp-content/uploads/2015/09/Achieving-Risk-Ignition.pdf
I will try not to paraphrase too badly, but I interpret the core message message to be that holding bonds in the portfolio is a volatility hedge to insure against the risk of permanent loss of capital, which is taken at the price of lower expected return. However this hedge is primarily against uncommon tail events in which stocks get thrashed in a particular year.
I wonder whether it would be practical to run a spread portfolio of say 20 stocks, with an additional long bet on VIX, opened when VIX is low?
As someone with a day job, is there any value in this in a spread portfolio, could I make any gain from this in a day where I was unable to log in? Or would it provide insurance against a steep market decline, whereby the increasing equity in my VIX bet offsets the declining equity in my dropping shares?
Thoughts?
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I don't know if you have an easier way than me - maybe your broker offers you an option - but going long or short the VIX isn't as trivial as it sounds. There are a few ETF-like instruments set up to try and replicate the VIX, but they all have their own problems with regard to how they construct their 'replicating' portfolio.
I might suggest buying a put option. Buying a put option is like being short the index and long volatility, since you make money if the index moves downward, you make money if volatility spikes upwards, and you make a lot of money when both happen at the same time (a la a few weeks ago). If you're looking to hedge extreme drawdowns, put options are (in my opinion) a more 'vanilla' and more transparent way of doing it. Clearly, when the VIX is low, put options will be cheap (since the VIX is calculated from those very options).
As to whether it's a wise strategy or not... that sort of depends on the outcome you're pursuing. Pursuing a strategy or buying long-dated put options is really a way of 'smoothing' your returns somewhat. You're protecting yourself from extreme drawdowns in exchange for paying your option premium, which will decay if it's all rosy. Depending on how out-of-the-money the option is, you might even have a worthless option in a gently declining market.
Being long VIX does much the same thing. Since the market doesn't tend to 'spike' upwards, you don't get much benefit from a sharply rising market. You get a big payoff in a rapidly falling one, and you get nothing in a gently rising/falling one.
