Choosing Benchmarks for Long–Short VIX Futures Strategies
Summary
The document discusses how to evaluate a long–short VIX futures strategy when neither a purely long nor purely short position is an obvious comparison. One response suggests cash as a benchmark if the strategy has no directional bias, representing the return available while taking no market risk. Another proposes comparing historical performance with randomly generated strategies that alternate among flat, long, and short exposures, with the proportions adjusted to resemble the strategy being assessed.
A further suggestion depends on the strategy’s intended use: compare a personal strategy with the investor’s next best alternative, or use a volatility hedge fund index when evaluating a strategy intended for outside capital. These are alternative benchmarking perspectives rather than a single standard. The document does not specify a preferred approach, address matching leverage or risk, or establish that the random strategies are statistically suitable controls. Benchmark choice should therefore reflect the strategy’s exposures and the decision it is meant to inform.
Key ideas
- Cash can serve as a benchmark for a strategy designed to have no directional bias.
- Randomized flat, long, and short exposures can provide a historical comparison group.
- A personal strategy can be assessed against the investor’s next best alternative.
- A volatility-focused index may be relevant when presenting a strategy for outside investment.
- The document offers options but does not prescribe risk or leverage adjustments.
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Full text
# What is the appropriate benchmark for a Long/Short VIX futures strategy? # What is the appropriate benchmark for a Long/Short VIX futures strategy? Trying to figure out the benchmark for a L/S Vix futures stragegy, doesn't seem like only long or short Vix futures would be appropriate, any ideas? Thx ## Answer by Chris Taylor (score 9, accepted) https://quant.stackexchange.com/a/47239 If your strategy truly has no directional bias, then the benchmark should be cash (ie whatever you would earn using the capital in your trading account and taking no risk). ## Answer by nbbo2 (score 6) https://quant.stackexchange.com/a/47241 You could compare it, over the historical period of interest, to 1000 randomly generated VIX strategies which are: Flat on 60 Percent of days (randomly chosen days) Long VIX futures on 20% of days Short VIX futures on 20% of days (You would adjust these percentages to the characteristics of your strategy. I guessed these values from your comment). The rank of your strategy among the 1000 random strategies would give you an idea of the performance of your strategy. ## Answer by user89135 (score 5) https://quant.stackexchange.com/a/47240 If you are developing this strategy to use personally, I would benchmark it against your next best option. If the strategy has been developed to attempt to manage other peoples money I would benchmark it against the HFRX RV: Volatility Index. This is an index of alternatives that a Vol investor would consider versus investing in your strategy. From HFRX Indices: > HFRX RV: Volatility Index Volatility strategies trade volatility as an asset class, employing arbitrage, directional, market neutral or a mix of types of strategies, and include exposures which can be long, short, neutral or variable to the direction of implied volatility, and can include both listed and unlisted instruments. Directional volatility strategies maintain exposure to the direction of implied volatility of a particular asset or, more generally, to the trend of implied volatility in broader asset classes. Arbitrage strategies employ an investment process designed to isolate opportunities between the price of multiple options or instruments containing implicit optionality. Volatility arbitrage positions typically maintain characteristic sensitivities to levels of implied and realized volatility, levels of interest rates and the valuation of the issuer's equity, among other more general market and idiosyncratic sensitivities. Hedge Fund Research, Inc. (HFR) utilizes a UCITSIII compliant methodology to construct the HFRX Hedge Fund Indices. The methodology is based on defined and predetermined rules and objective criteria to select and rebalance components to maximize representation of the Hedge Fund Universe. HFRX Indices utilize state-of-the-art quantitative techniques and analysis; multi-level screening, cluster analysis, Monte-Carlo simulations and optimization techniques ensure that each Index is a pure representation of its corresponding investment focus.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.