Trying to figure out the benchmark for a L/S Vix futures stragegy, doesn't seem like only long or short Vix futures would be appropriate, any ideas? Thx
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1$\begingroup$ You should be more precise about the strategy. Long/Short VIX gives rise to vol exposure or it's built in a way it does not? Or else? Otherwise asked this way a benchmark (i.e. a tradable systematic and representative portfolio) is L/S Vix. $\endgroup$– VitomirAug 21, 2019 at 17:39
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1$\begingroup$ @Vitomir It's built in a way that it does not......the split of L/S trades is about 50/50, and it participates in about 30-40% of trading days. $\endgroup$– hernanavellaAug 21, 2019 at 17:43
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1$\begingroup$ Is your strategy long or short depending on its signal and vol neutral over time? or vol neutral with every trade? $\endgroup$– amdoptAug 21, 2019 at 19:20
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1$\begingroup$ @amdopt there's no top down design regarding vol neutrality. I just aggregate the individual signals, it happens to be a similar number of longs vs short. The one thing is that I do adjust the size of longs vs shorts to have the same vol. $\endgroup$– hernanavellaAug 21, 2019 at 21:09
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$\begingroup$ Thanks. I ask because it was unclear and an answer below suggested cash as a benchmark which could have been acceptable if you were always neutral. Given that you aren't, cash is not an appropriate option, IMO. Your OP should expand upon the characteristics of your model a bit. $\endgroup$– amdoptAug 21, 2019 at 21:16
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3 Answers
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If your strategy truly has no directional bias, then the benchmark should be cash (ie whatever you would earn using the capital in your trading account and taking no risk).
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You could compare it, over the historical period of interest, to 1000 randomly generated VIX strategies which are:
Flat on 60 Percent of days (randomly chosen days)
Long VIX futures on 20% of days
Short VIX futures on 20% of days
(You would adjust these percentages to the characteristics of your strategy. I guessed these values from your comment).
The rank of your strategy among the 1000 random strategies would give you an idea of the performance of your strategy.
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$\begingroup$ this is a fine I idea for validation. I already do something similar. I was trying to find something accessible (beta if you will) for a third party to compare. $\endgroup$ Aug 21, 2019 at 21:10
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If you are developing this strategy to use personally, I would benchmark it against your next best option.
If the strategy has been developed to attempt to manage other peoples money I would benchmark it against the HFRX RV: Volatility Index. This is an index of alternatives that a Vol investor would consider versus investing in your strategy.
From HFRX Indices:
HFRX RV: Volatility Index
Volatility strategies trade volatility as an asset class, employing arbitrage, directional, market neutral or a mix of types of strategies, and include exposures which can be long, short, neutral or variable to the direction of implied volatility, and can include both listed and unlisted instruments. Directional volatility strategies maintain exposure to the direction of implied volatility of a particular asset or, more generally, to the trend of implied volatility in broader asset classes. Arbitrage strategies employ an investment process designed to isolate opportunities between the price of multiple options or instruments containing implicit optionality. Volatility arbitrage positions typically maintain characteristic sensitivities to levels of implied and realized volatility, levels of interest rates and the valuation of the issuer's equity, among other more general market and idiosyncratic sensitivities. Hedge Fund Research, Inc. (HFR) utilizes a UCITSIII compliant methodology to construct the HFRX Hedge Fund Indices. The methodology is based on defined and predetermined rules and objective criteria to select and rebalance components to maximize representation of the Hedge Fund Universe. HFRX Indices utilize state-of-the-art quantitative techniques and analysis; multi-level screening, cluster analysis, Monte-Carlo simulations and optimization techniques ensure that each Index is a pure representation of its corresponding investment focus.
