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Why VIX Futures Are an Imperfect Hedge for Stock Portfolios

Article Quant Q&A · Author: pteetor
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Summary

The discussion cautions against assuming that VIX futures will reliably offset losses in a long-only equity portfolio. VIX measures expected volatility, and it does not invariably rise when stocks fall; consequently, an inverse relationship with stock returns cannot be treated as a dependable hedge ratio. The responses also distinguish protection against sharp, tail-like market moves from protection against ordinary downside movements, suggesting VIX exposure may be more relevant to kurtosis risk.

The answers do not provide a quantitative method for choosing a futures expiration or contract count, and they offer no measured hedge performance. One response notes additional complexities for VIX exchange-traded funds, while another suggests shorting stock-index futures or an index fund as a more direct hedge. These are brief cautions and suggestions rather than a systematic comparison; contract basis, roll effects, costs, and portfolio-specific calibration are not analyzed.

Key ideas

  • VIX futures are not guaranteed to rise when equities decline.
  • Volatility exposure does not directly replicate protection against stock market losses.
  • VIX exposure may be more useful for tail or kurtosis risk than routine downside hedging.
  • Short stock-index futures or index funds are suggested as more direct hedge instruments.

Tags

EquitiesFuturesVolatilityRisk management
Full text
# Hedging stocks with VIX futures


# Hedging stocks with VIX futures












It seems that VIX futures could be a great hedge for a long-only stock portfolio since they rise when stocks fall. But how many VIX futures should I buy to hedge my portfolio, and which futures expiration should I use?

## Answer by user59 (score 20, accepted)

https://quant.stackexchange.com/a/16

VIX measures volatility. It doesn't always go up if stocks go down.

## Answer by isomorphismes (score 12)

https://quant.stackexchange.com/a/32

VIX also has a lot of complexities that make it a less-than-ideal hedging tool if you're buying a VIX ETF.

http://vixandmore.blogspot.com/ goes into it at length and can probably also answer any questions you have about the VIX as a hedge.

To expand on what @barrycarter said, the VIX is better as a hedge against kurtosis, not against downward movements.

## Answer by Gaston (score 3)

https://quant.stackexchange.com/a/3512

We just made a video on CBOE-VIX Hope you like it https://vimeo.com/41915075

## Answer by Alex Kong (score 0)

https://quant.stackexchange.com/a/49881

VIX futures doesn't always inversely correlated to stock returns. A better approach I can think of is to short stock index futures or index ETF for hedging.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.