Volatility Strategy

 
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The Arc Volatility Strategy (VOL) seeks to deliver risk management services against a falling market.

It accomplishes this by investing in products which are negatively correlated with equity performance in times of market instability. This can balance out the losses in the remainder of a client’s portfolio.

 

Drawdown Protection

Since 2007, a combination of the S&P 500 with a 25% allocation to Arc VOL delivered a 30% increase in expected return and a 30% decrease in volatility.

Based on stress tests using Bloomberg’s scenario tool, the overall drawdown from February 2007 to February 2009 to a typical client portfolio with Arc VOL would have been only 7.5% as compared to 45% without a hedge.

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2008 Event with and without vol hedge*

*The Arc Volatility Strategy is a combination of our proprietary backtest strategy and the live results of the Strategy from September 2015 until March 2018.
 

Asymmetric Coverage

In February of 2018, the Strategy rose 3 times the peak-to-trough drawdown in the S&P 500 index.

As the S&P 500 continues to make new highs, the Strategy preserved much of its gains throughout the year.

ARC VOL vs S&P 500 (SPX), 2018

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FAQ

+ How does this type of hedge work?

Bryan will tell you.

+ When should I hedge?

Timing is a key component of a proper hedge and affects both when the hedge should be bought and when it should be sold. The cost of protection is much lower when a hedge position is acquired when the relevant options (e.g. S&P 500 Futures) are at a low price. It is not advisable to wait until a market event is imminent to acquire a hedge position due to the difficulty of predicting market swings.

It is equally important to know when to sell a hedge position, this pivotal period can be navigated by our experienced management team in conjunction with the wishes of the client.

+ What does it cost to hedge?

While there is a management fee and, in the case of a significant event, a performance fee, the most important cost aspect of a hedge is the 'burn rate' of the product. This refers to any loss in value when options are rolled over at the end of their contract period. For example, during the period from August 2015 to August 2018, $1 worth of protection in VXX would have decayed to $0.07 in comparison to $0.47 for $1 in the Arc VOL strategy.

+ What are the advantages of a professionally managed hedge?

In addition to the cost savings from active management, in the event of a major market correction, trading over the counter (OTC) products such as options has added complexity due to counterparty risk. An experienced professional who is able to keep a calm head and is familiar with the unique environment of an unstable market can lead to preferential outcomes.