Tim Edwards Slides RMC Asia 2015 PDF

S&P Dow Jones Volatility Indices Performance
Tim Edwards
November 30, 2015
For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Permission to reprint or distribute any content from this presentation requires the written approval of S&P Dow Jones Indices.
S&P Volatility Indices

600%
500%
400%
300%
200%
100%
0%
11-2006
11-2007
11-2008
11-2009
11-2010
11-2011
11-2012
11-2013
11-2014
S&P 500 (TR)
S&P 500 Dynamic VEQTOR Index
S&P 500 VIX Mid-Term Futures
S&P 500 Dynamic VIX Futures
S&P 500 VEQTOR Switch
S&P 500 VIX Short-Term Futures
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results. These
charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations
associated with back-tested performance.

Live Performance
S&P 500 VIX Short-Term Futures Index: Jan 2009 Nov 2015
-99.67%
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.
Outline
Investable Volatility
Features of volatility as a hedge
Increasing focus on volatility risk premia

How much contango is normal?
Applications to indices and ETFs

Section 1: Drivers of Demand for Long Volatility Exposures

Negative Correlation
S&P 500 VIX Short-Term Futures Index: Live Performance Jan 2009 Nov 2015
100,000,000
10,000,000
3000
1,000,000
100,000
10,000
1,000
100
300
Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov Apr Sep
2009 2009 2009 2010 2010 2011 2011 2011 2012 2012 2013 2013 2014 2014 2014 2015 2015
S&P Short Term VIX Futures (Left Axis, Logarithmic)
S&P 500 (Right Axis, Logarithmic)
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

Major Event Performance

Performance of the S&P 500 VIX Short-Term Futures Index selected dates
Year
Dates
Event
Index
2006
10 May - 14 Jun
U.S. inflation scare
+ 61%
2007
19 Jun - 16 Aug
Bear Sterns HF liquidated
+ 97%
2008
19 Sep - 19 Nov
Lehman Bankruptcy
+ 264%
2010
23 Apr - 20 May
Flash Crash
+ 87%
2011
22 Jul - 22 Sep
Debt Ceiling Crisis & U.S Downgrade
+ 141%
2012
26 Mar - 18 May
Euro / Greek Debt Crisis
+ 47%
2013
07 May - 24 Jun
Taper tantrum
+ 26%
2014
18 Sep - 15 Oct
ECB disappoints on stimulus
+ 58%
2014-5
05 Dec - 15 Jan
Russian equity collapse
+ 40%
2015
10 Aug - 01 Sep
Chinese market crash / global uncertainty
+ 96%
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Table is provided for illustrative purposes. Past performance is no guarantee of future results. These
Convexity
S&P 500 VIX Short-Term Futures Index versus S&P 500 (Dec 2005 Nov 2015)
S&P Short-term VIX Futures Index TR
21-trading day % change
200%
150%
100%
50%
0%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
S&P 500 - 21 trading day % change

Persistence of Diversification Effects

Correlations between the S&P 500 and various indices, past 10 years
24M Trailing Correlation to S&P 500

(Dec 2005 Nov 2015)
S&P Developed BMI

S&P Europe 350
S&P Emerging BMI
S&P GSCI
S&P GSCI Gold
S&P 30Yr U.S. Treasury Futures
U.S. Dollar Index
S&P 500 VIX Short-Term Futures Index
Ave
Max
1.0
0.9
0.8
0.5
0.1
-0.3
-0.5
-0.8
1.0
0.9
0.9
0.9
0.5
0.2
0.2
-0.7
Source: S&P Dow Jones Indices LLC. Data as of November 30, 2015. All index performance considered was total return index in USD. Table provided for illustrative purposes. Past performance
is no guarantee of future results. These charts and graphs may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information
regarding the inherent limitations associated with back-tested performance.

Demand expression via ETPs

AUM in the six largest volatility-only exchange traded products Jan 2009 Nov 2015
Top 6 Volatility ETP Assets ($ bns)
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun
2009 2009 2010 2010 2011 2011 2012 2013 2013 2014 2014 2015
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares. Data as of November, 2015. Chart is provided for illustrative purposes. Past performance is no
guarantee of future results.

10
Section 2: Longer Term Performance

11
HY Returns
S&P 500 VIX Short-Term Futures Index: years & quarters (Dec 2006 Nov 2015)
Full Year Total Return
Q1
Q2
Q3
Q4
2007
43%
0%
-3%
27%
16%
2008
126%
12%
-22%
23%
109%
2009
-65%
17%
-40%
-27%
-32%
2010
-72%
-37%
49%
-45%
-46%
2011
-10%
-21%
-29%
157%
-38%
2012
-76%
-50%
-16%
-35%
-14%
2013
-66%
-35%
0%
-27%
-27%
2014
-26%
-1%
-32%
10%
1%
2015 (to date)
-41%
-18%
-21%
28%
-29%
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Table is provided for illustrative purposes. Past performance is no guarantee of future results. These

12
Short Volatility
250%
200%
150%
Notional Short Position

100%
S&P 500 VIX Short-Term Futures

50%
0%
01-2009
01-2010
01-2011
01-2012
01-2013
01-2014
01-2015
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. Total return index in USD. Hypothetical short position does not reflect transaction costs,, borrowing costs and is not intended to
reflect a realistic investment strategy. Chart is provided for illustrative purposes only. Past performance is no guarantee of future results.

13
Short Volatility - Rebalanced

S&P 500 VIX Short-Term Futures Inverse Daily Index: Dec 2006 Nov 2015
450
400
350
300
250
200
150
100
50
0
Jan Aug Mar Oct May Dec Jul Feb Sep Apr Nov Jun Jan Aug Mar Oct May
2006 2006 2007 2007 2008 2008 2009 2010 2010 2011 2011 2012 2013 2013 2014 2014 2015

14
Section 3: VIX Futures Term Structure Dynamics

15
Contango: Example
VIX Futures Term Structure as of 4th November, 2013
20
19
18.6
18
19.0
19.3
19.6
18.1
17
17.5
16
16.5
15
15.1
14
14.0
13
12
12.9
Spot Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14
Source: CBOE. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

16
Contango Hypothetical Attribution
80 Historical Max 80.86
Demand for
Short VIX
Futures
Major
Event?
Reversion
to mean?
VIX
Future
No
Change?
Long-Term
Average
Arbitrage
Channel
Always > 0
Source: S&P Dow Jones Indices LLC. Provided for illustrative purposes only.

Next VIX
Future
= Previous Future
expected change
demand premium
subject to arbitrage
bounds
Demand for
Long VIX
Futures
17
What Drives Performance?

Correlations of changes in the S&P 500 VIX Short-Term Futures Index to changes in
the VIX index, and to futures curvature (Feb 2009 Nov 2015)
Correlation to S&P 500 VIX Short-Term Futures

Index Return
1.00
VIX Index
0.90
Average 1st vs 2nd Future contango over period
0.87
0.82
0.80
0.86
0.64
0.60
0.60
0.46
0.40
0.20
0.02
0.00
1 Day
1 Month
1 Quarter
1 Year
Source: S&P Dow Jones Indices LLC. Data as of November, 2015. 1st to 2d Futures Contango is the average percentage difference taken over the performance measurement period between the then-current first and second monthly future from expiry. Performance is total return index in USD. Chart is provided for illustrative purposes. Past performance is no guarantee of
future results.
18
Section 4: Supply / Demand Dynamics

19
Linear Regression
Historical 1st & 2nd VIX Futures Prices, Daily (Jan 2009 Nov 2015)
60
50
y = 0.9336x + 2.5006
40
2nd Future 30
20
10
0
0
10
20
30
Front Future
40
50
60
Source: CBOE. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

20
Consequences of Linearity
VIX Futures as current mean reversion premium
F2 = 0.9333 F1 + 2.5
= F1 + (1/15)*( 20 F1) + 1.14
Equation describes mean reversion to 20 (at 1/15 per month) plus 1.14 premium
Current prices compared to those predicted by linear regression

(Loosely) defines the current premium, and tell if it is above/below average

21
Reality Check
S&P 500 VIX Short Term Futures Index performance interpreted
Total return January 30, 2009 to November 17, 2015 of -99.67%
VIX from 44.84 to 18.84 (fall of 58%) over the same period
Adjusted performance of -99.22%, equivalent to -5.78% per month
-5.78% x 21 (average VIX Futures price) = 1.20 VIX points (vs 1.14 estimated)
Sources: S&P, CBOE. Past performance is no guarantee of future results.

22
Historical Premium
Approximation to the premium in near VIX futures
6
4
2
0
-2
-4
-6
-8
-10
Feb
2006
Feb
2007
Feb
2008
Feb
2009
Feb
2010
Feb
2011
Front Future Price > 35
Feb
2012
Feb
2013
Feb
2014
Feb
2015
Model-implied premium
Source: S&P Dow Jones Indices LLC, CBOE. Data as of November, 2015. Model implied premium is a trailing 21-day average of the difference between the price of the then-current 2nd VIX
Future and that approximated by the model, i.e. 87.5% of the then-current 1st VIX Future, plus 2.5. Chart is provided for illustrative purposes. Past performance is no guarantee of future results.

23
Net VIX ETP Exposures
Top 6 Volatility ETP Assets ($ bns)
Accounting for inverse and leveraged VIX exchange-traded products

4.5
4.0
3.5
ETP total assets

Net Exposure (accounting for leverage)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares. Data as of November, 2015. Chart is provided for illustrative purposes. Past performance is no

24
ETP Net Assets and Futures Premium

5.0
Model Implied
Premium
4.0
3.5
3
3.0
Net ETP Exposure

(adjusted for leverage,
$bns)
2.5
2.0
1.0
1.5
0.0
-1.0
-2.0
0.5
-3.0
Jan Sep May Jan Sep May Jan Sep May Jan Sep
2009 2009 2010 2011 2011 2012 2013 2013 2014 2015 2015
Model-Implied Premium (Left Axis)
Net Exposure ($bn, Right Axis)
Source: S&P Dow Jones Indices LLC, Barclays Capital, ProShares, Credit Suisse / Velocityshares as of November 2015. Chart is provided for illustrative purposes. Past performance is no

25
Conclusions
VIX Futures indices
Potentially attractive hedging properties; yet poor performance 2009-2015
Different drivers dominate long-term returns than short-term returns

As demand changes, the past may become particularly poor guide to the future
Current marketplace suggests a balance between long and short demand for ETPs

26
THANK YOU
Contact Us
Tim Edwards, PhD
tim.edwards@spdji.com

27
PERFORMANCE DISCLOSURE
The S&P 500 VIX Short Term Futures Index and the S&P 500 Mid-Term Futures Index were launched on December 22, 2008; The S&P 500 VIX Short Term Futures Inverse Daily Index was
launched on August 5th, 2012. All information presented prior to the launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are
based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.spdji.com. It is not possible to invest directly in
an index.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first day for which there is a calculated value (either live or
back-tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index
are first considered live: index values provided for any date or time period prior to the indexs Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date
by which the values of an index are known to have been released to the public, for example via the companys public website or its datafeed to external parties. For Dow Jones-branded indicates
introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed Date of introduction) is set at a date upon which no further changes were permitted to be made to the
index methodology, but that may have been prior to the Indexs public release date.
Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the
back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at
www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects the application of the index
methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors
related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect
actual performance.
The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and
performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the
Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to
be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of
1.5% was imposed at the end of the period on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual
1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2% (or US $27,200).

28
GENERAL DISCLAIMER
Copyright 2015 by S&P Dow Jones Indices LLC, a part of McGraw Hill Financial. All rights reserved. Standard & Poors and S&P are registered trademarks of Standard & Poors Financial Services
LLC (S&P), a part of McGraw Hill Financial. Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones). Trademarks have been licensed to S&P Dow Jones Indices
LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P
Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively S&P Dow Jones Indices) do not have the necessary licenses. All information provided by S&P Dow Jones Indices
is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past
performance of an index is not a guarantee of future results.
It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. S&P Dow Jones Indices does not
sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of
any index. S&P Dow Jones Indices makes no assurance that investment products based on the index will accurately track index performance or provide positive investment returns. S&P Dow Jones
Indices LLC is not an investment advisor, and S&P Dow Jones Indices makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A
decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth in this document. Prospective investors are advised to
make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document
that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold
such security, nor is it considered to be investment advice. Closing prices for S&P US benchmark indices and Dow Jones US benchmark indices are calculated by S&P Dow Jones Indices based on
the closing price of the individual constituents of the index as set by their primary exchange. Closing prices are received by S&P Dow Jones Indices from one of its third party vendors and verified by
comparing them with prices from an alternative vendor. The vendors receive the closing price from the primary exchanges. Real-time intraday prices are calculated similarly without a second
verification.
These materials have been prepared solely for informational purposes based upon information generally available to the public and from sources believed to be reliable. No content contained in
these materials (including index data, ratings, credit-related analyses and data, research, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be
modified, reverse-engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of S&P Dow Jones Indices. The
Content shall not be used for any unlawful or unauthorized purposes. S&P Dow Jones Indices and its third-party data providers and licensors (collectively S&P Dow Jones Indices Parties) do not
guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Dow Jones Indices Parties are not responsible for any errors or omissions, regardless of the cause, for the
results obtained from the use of the Content. THE CONTENT IS PROVIDED ON AN AS IS BASIS. S&P DOW JONES INDICES PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED
WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE
ERRORS OR DEFECTS, THAT THE CONTENTS FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE
CONFIGURATION. In no event shall S&P Dow Jones Indices Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages,
costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of the Content even if advised of the possibility of such
damages.
VIX is a registered trademark of Chicago Board Options Exchange, Incorporated. The VIX methodology is the property of the Chicago Board Options Exchange ("CBOE"). CBOE has granted
Standard & Poors Financial Services LLC ("S&P"), a license to use the VIX methodology to create the S&P 500 VIX Futures Index Series.

29

Tim Edwards Slides RMC Asia 2015 PDF

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tim Edwards Slides RMC Asia 2015 PDF

Uploaded by

Copyright:

Available Formats

S&P Dow Jones Volatility Indices Performance

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

S&P Volatility Indices

S&P 500 (TR)

S&P 500 Dynamic VEQTOR Index

S&P 500 VIX Mid-Term Futures

S&P 500 Dynamic VIX Futures

S&P 500 VEQTOR Switch

S&P 500 VIX Short-Term Futures

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Increasing focus on volatility risk premia

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Section 1: Drivers of Demand for Long Volatility Exposures

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

S&P 500 (Right Axis, Logarithmic)

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Major Event Performance

U.S. inflation scare

Bear Sterns HF liquidated

Debt Ceiling Crisis & U.S Downgrade

Euro / Greek Debt Crisis

ECB disappoints on stimulus

Russian equity collapse

Chinese market crash / global uncertainty

S&P 500 - 21 trading day % change

Persistence of Diversification Effects

24M Trailing Correlation to S&P 500

S&P Developed BMI

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Demand expression via ETPs

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Section 2: Longer Term Performance

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

2015 (to date)

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Notional Short Position

S&P 500 VIX Short-Term Futures

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Short Volatility - Rebalanced

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Section 3: VIX Futures Term Structure Dynamics

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Contango Hypothetical Attribution

80 Historical Max 80.86

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

What Drives Performance?

Correlation to S&P 500 VIX Short-Term Futures

Average 1st vs 2nd Future contango over period

Section 4: Supply / Demand Dynamics

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Current prices compared to those predicted by linear regression

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Front Future Price > 35

For Financial Professionals. Not for Public Distribution. PROPRIETARY.

Net VIX ETP Exposures

Top 6 Volatility ETP Assets ($ bns)

Accounting for inverse and leveraged VIX exchange-traded products

ETP total assets

For Financial Professionals. Not for Public Distribution. PROPRIETARY.