Implied volatility based products have not provided the hedge effectiveness many managers were looking for in 2011. In some instances, particularly as implied volatility came off sharply, index options simply did not perform as expected for many portfolios.
The chart below shows VIX futures versus the HY CDX total return index as an example of someone trying to hedge a credit portfolio with a VIX product. Having worked reasonably well through August-October, the hedge behaved poorly for the rest of the year.
|HY CDX vs. VIX Futures|
There are alternatives to using equity volatility products to hedge a portfolio. One of those is the Dow Jones Market Neutral Anti-Beta Index. It represents a market neutral basket of stocks which is long low beta stocks and short high beta stocks. The idea is that during market uncertainty and risk aversion, high beta stocks will under-perform low beta stocks. The chart below shows that when properly scaled, a hedge using this index would be fairly effective.
|HY CDX vs. Dow Jones Market Neutral Anti-Beta Index|
Dow Jones Market Neutral Anti-Beta Index