ARC Volatility protection Fund

 
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AVP

The Arc Volatility Protection (AVP) Fund is an actively managed portfolio hedge that aims to preserve wealth during bear markets. It seeks to accomplish this by investing in a portfolio of options which gain significantly in value during market corrections. This is intended to offset losses in other asset classes and to increase liquidity when it is needed most.

From stability to uncertainty

From the end of 2015 until the end of 2017, US equity markets exhibited a period of record calm as indicated by the VIX1. Through that period the AVP fund cost an average premium of 1.7% per month, significantly outperforming passive hedges like the VXX, which averaged a 5.1% decline over the same period.

Starting in 2018 however, volatility has returned to more normal levels with the median VIX level returning to around 15. The chart below on the right shows almost 3 decades of VIX observations. Even though 2018 has felt like a violent storm, on a historical basis it was merely a return to more normal levels of market voltility. There is still plenty of room for it to move higher as the global economy undergoes a number of major transitions next year.

The largest and most uncertain of those change will be when, for the first time in 10 years, global central banks turn from net buyers of assets to net asset sellers. This would remove a significant amount of liquidity from markets at a time when market valuations are historical highs. This is when we are most likely to revisit the upper ranges of historical VIX levels.

1 The VIX Index is based on real-time prices of options on the S&P 500® Index (SPX) and is designed to reflect investors’ consensus view of future (30-day) expected stock market volatility.

Portfolio Protection fund vs VXX*

*AVP performance net fees since inception in comparison to the VXX Past results do not indicate future returns.  For notes on charts and general fee schedule, please see  Disclaimers

*AVP performance net fees since inception in comparison to the VXX Past results do not indicate future returns.

For notes on charts and general fee schedule, please see Disclaimers

Distribution of VIX (1990-Present)

Source: CBOE

Source: CBOE

putting AVP to the test

At the end of October 2018, the S&P 500 Index was relatively unchanged for the year despite two months of significant bursts in volatility. During these drawdowns, the Arc Volatility Protection Fund performed as anticipated, delivering a sharp offsetting gain to the losses experienced in global equity markets. As the current bull market cycle reaches its 10th year, we expect these bouts to continue.

Because markets rarely fall in a straight line, you need a team of volatility traders to actively manage your hedges in order to lock in gains that occur over multiple downdrafts mixed with violent reversals. This is textbook bear market behavior. We cannot tell how long it will persist, but we do believe that your best protected with the AVP actively managed by a team with decades of volatility trading experience from the top Wall Street institutions.

Arc Volatility Protection Fund versus the S&P 500 Index (2018 Year-to-Date)


The goal of the arc volatility protection fund is to give our clients the power to protect wealth through bear markets without losing control.

Target coverage ratios, method of access and other details are tuned to meet the needs of individual client portfolios. Please contact us for more information.

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