Attain presents Why Alternatives? The Future of VIX Futures

As our discussion of alternatives continues this week, we took a moment to chat with James Lubin of the CBOE, where he works closely with those promoting VIX futures. We’ve touched on VIX futures in the managed futures space in the past, but seeing as it’s a market that has yet to be thoroughly explored by the CTA space. James broke down some of the dynamics and history of the market, and if you ask us, it should be an interesting alternatives market to watch over the coming years.

Disclaimer: Futures trading is complex, and presents the risk of substantial losses. As such, it may not be suitable for all investors.

1. When were VIX futures introduced?

CBOE Volatility Index (the VIX Index) futures were launched on the CBOE Futures Exchange (CFE) in 2004.  The contract has witnessed particularly wide acceptance and broader participation since the 2008 financial crisis, when the U.S. stock market lost more than a third of its value. During this period, alternative investments such as real estate, commodities and hedge funds suffered similar declines and provided little, if any, diversification benefits. The spotlight shown brighter on the diversification value of the CBOE VIX Index after those events.

2. What went into the development of the contract?

In 2003, CBOE revised the methodology for the CBOE Volatility Index to measure the implied volatility being projected through prices of S&P 500 index options (SPX), versus through prices of S&P 100 options (OEX) as had been in place since 1993.  By incorporating a variety of options in the calculation, the “new” VIX index offers an indication of 30-day implied volatility as priced by the options market. Incidentally, the VXO index, reflecting implied volatility of the OEX, still exists, but the VIX Index created in 2003 is the benchmark that most volatility traders look to for portfolio diversification of the broader market as a whole.

3. What has the growth of the market been like?

Liquidity in VIX futures, as measured both in volume and open interest, has been quite impressive.  Average daily volume, the standard metric in the futures industry, has risen over the past few years, from 17,000 contracts in 2010 to 48,000 contracts in 2011 to 67,000 contracts in 2012 YTD.

4. What kind of demographics are trading VIX futures- is it mostly institutional or professional money manager type investors? Are more retail investors joining the game?

Participation in VIX futures has been primarily institutional investors and professional money managers.  The constituents within the institutional client classification include: ETF/ETN providers, commodity trading advisors, hedge funds, investment banks and proprietary trading firms.  We have also seen more interest from the high net worth investor, not only in VIX futures, but also in our Emerging Markets VIX and Brazil Equity VIX futures products.

5. What benefit do you think VIX futures offer to professional money managers?

A professional money manager’s portfolio can typically be segmented into six assets classes: fixed income, equity, foreign exchange, energy, metals and agriculture.  Volatility represents a seventh asset class, a source of alpha that has been unable to be pursued prior to the listing of VIX futures.  The inclusion of VIX futures in a diversified portfolio provides the professional money manager with an instrument that adds the potential for diversification benefits as well as for achieving non-correlated returns.

6. Working in the alternative investment space, how important do you believe alternatives are to the average investor’s portfolio?

As we know from academic studies and through correlation analysis such as the Efficient Frontier, diversification is a key component in obtaining improved risk-adjusted returns.  The addition of alternative investments — provided the investor fully understands the risk-reward scenarios — is valid for a typical equity/fixed income portfolio seeking to obtain diversification.   At the same time, investors must understand the risks involved when investing in alternatives and obtain professional advice to determine the percentage allocation they should devote to alternative investment strategies.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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