Over the last month, we’ve tested a number of common strategies for trading VIX ETPs. And while we can’t speak for all traders, based on all of my readings both academic and in the blogosphere, the strategies we’ve tested are broadly representative of how the vast majority of quantitative traders are trading these products.
As we’ve noted in the past, most of these strategies are struggling badly at the moment. Below I’ve shown the April and YTD results of 11 strategies we’ve blogged about previously, trading XIV and VXX (read about test assumptions). For comparison, buying and holding XIV is included in grey.
The only strategy that’s shined this year is the revised TM RSI(2) strategy. That strategy trades too infrequently to be the core of a portfolio all by itself, and I have some serious misgivings about trading VIX ETPs using a Martingaling approach, but there’s no denying that the strategy has been extremely accurate when it does decide to put a toe in the water.
Why the poor performance recently? At least part of the answer is market strength and whipsaws.
As previously discussed, the resilience that the market has exhibited over the last 1+ year in the face of market pullbacks, while not unprecedented, is unusual. When these strategies have moved to a more defensive posture, either to cash or long volatility, following a market pullback, the market has consistently rebounded sharply.
But this degree of market strength is, by its nature, not sustainable. The market will return to “normal” where cautiously reducing exposure to XIV, ZIV, etc. during strong volatility is the best answer.
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Note that when the strategies that we cover on our blog signal new trades, we include an alert on the daily report sent to subscribers. This is completely unrelated to our own strategy’s signal; it just serves to add a little color to the daily report and allows subscribers to see what other quantitative strategies are saying about the market.
Volatility Made Simple