Clinamen Financial Group LLC : VIX Portfolio Hedging (VXH) Program - Proprietary

Summary

The goal of the VIX Portfolio Hedging (VXH) program is to offer protection to equity and equity index investors against sudden and severe market shocks by investing in short-term futures contracts on the CBOE Volatility Index (VIX). The VIX index is a widely-followed measurement of the short-term implied volatility in S&P 500 option prices. Few asset classes exhibited a low or negative correlation to equities during the financial crisis of 2007-2008; volatility was an exception. The VXH program is designed to provide access to long volatility assets as a means of hedging existing equity exposure.

Investment Strategy

The VXH program establishes long positions in VIX futures according to a defined allocation formula, and “rolls” those positions on a monthly basis by selling existing contracts and buying new, longer-dated contracts. The VXH program is not expected to yield meaningful profits in many market environments, and may experience small losses on a regular basis. Profits are achieved when S&P 500 implied volatility rises, which historically has coincided with large and/or sudden declines in equity prices. Because of the expected return profile of the VXH program, it is essential that clients avoid participating in the program on a short-term or ad hoc basis. Clients who participate in the program are strongly urged to do so for a period not less than (3) calendar years. The allocation formula maintains a minimal level of constant volatility exposure but may increase exposure substantially in response to changes in the historical and implied volatility of the S&P 500 index. The allocation formula does not rely on methods such as fundamental analysis or subjective technical analysis (i.e., chart visuals or pattern recognition); the formula relies only on changes in historical and implied volatility.