In this groundbreaking exploration of volatility investing, presented by Tony Cooper of Double-Digit Numerics, the conventional avenues of investing in volatility—options, futures, or variance swaps—are challenged by the emergence of volatility-related Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs).
These innovations have democratized volatility trading, providing retail investors and fund managers unprecedented accessibility without the need for complex futures market involvement.
The primary objective of this research is to devise a practical trading strategy utilizing these novel instruments. By elucidating the origins of volatility returns and dispelling prevalent misconceptions, the paper introduces five distinct strategies tailored to diverse investor preferences.
Four of these strategies are remarkably straightforward to describe and implement, showcasing extraordinary returns characterized by high Sharpe Ratios and, in some cases, negative correlation to the S&P500—an apparent anomaly that prompts a detailed discussion on associated risks and the metaphorical “steamroller.”
The research not only demonstrates the exceptional returns of these strategies but also explores their integration into existing portfolios to mitigate overall risk, especially during crises. These strategies exhibit positive exposure to markets in favorable times and negative exposure during downturns.
Despite occasional significant drawdowns, the paper recommends an adjustment to a traditional 60% equities, 40% bonds portfolio, reallocating to 55% equities, 35% bonds, and 10% volatility—an innovative approach to portfolio optimization in the realm of volatility investing.
Abstract Of Paper
For many decades the only way to invest in volatility has been through trading options, futures, or variance swaps. But in recent years a number of volatility-related exchange traded Funds (ETFs) and Exchange Traded Notes (ETNs) have been launched which make volatility trading accessible to the retail investor and fund managers without the need to access futures markets. Our objective is to devise a trading strategy using them. We document where volatility returns come from, clearing up some misconception in the process. Then we illustrate five different strategies that will appeal to different investors. Four of the strategies are simple to describe and implement. All of the strategies have had extraordinary returns with high Sharpe Ratios and low correlation to the S&P5’08 in some cases negative correlation. The returns seems to be too good to be true – like picking up $100 bills in front of a steamroller – so we have a detailed discussion on the risks and the nature of the steamroller.
We illustrate how these strategies can be incorporated into existing portfolios to reduce portfolio risk especially in times of crisis. They have positive exposure to the markets during good times and negative exposure during bad times. Unfortunately they do not always provide absolute returns and while reducing net portfolio drawdowns they can themselves have significant drawdowns. Still, we suggest that a traditional 60% equities, 40% bonds portfolio should be adjusted to 55% equities, 35% bonds, and 10% volatility.
Original paper – Download PDF
Here you can download the PDF and original paper of Easy Volatility Investing.
(An option to download will come shortly)
In this exploration by Tony Cooper, the focus is on easy volatility investing facilitated by volatility-related Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). The study aims to devise practical trading strategies, dispelling misconceptions about the sources of volatility returns.
Five distinct strategies are outlined, showcasing remarkable returns with high Sharpe Ratios and, in some cases, negative correlation to the S&P500. The study emphasizes the strategies’ risk considerations, likening favorable returns to picking up $100 bills in front of a metaphorical steamroller.
Furthermore, the research demonstrates how these strategies can be seamlessly integrated into existing portfolios to mitigate risk, suggesting a revised allocation for a traditional 60% equities, 40% bonds portfolio. The proposed adjustment entails a more risk-optimized allocation of 55% equities, 35% bonds, and 10% volatility.
In summary, this research provides a concise guide to easy volatility investing, offering practical strategies and risk management insights for investors navigating the dynamic landscape of financial markets.
– What is the primary focus of the research paper “Easy Volatility Investing” by Tony Cooper?
The research paper explores the concept of “Easy Volatility Investing” and aims to devise trading strategies using accessible volatility-related Exchange Traded Funds (ETFs) and Exchange Traded Notes (ETNs). It provides insights into the sources of volatility returns, dispels misconceptions, and introduces five different trading strategies suitable for various types of investors.
– What are the key characteristics of the trading strategies presented in the paper, and how have they performed?
The paper presents five different strategies characterized by their simplicity of description and implementation. These strategies have exhibited remarkable returns with high Sharpe Ratios and low correlation to the S&P 500. Some even display negative correlation. While the performance may seem exceptional, the paper addresses the associated risks and discusses the nature of these strategies.
– How can these volatility-based strategies be integrated into traditional portfolios, and what benefits do they offer for risk management?
The research illustrates how these strategies can be seamlessly integrated into existing portfolios to reduce overall portfolio risk, particularly during times of market crisis. These strategies provide positive exposure to markets during favorable conditions and negative exposure during turbulent times, making them valuable tools for portfolio risk management. The paper recommends adjusting traditional portfolios to include a 10% allocation to volatility as part of a risk management approach.