False sense of security: Weighing up volatility products

Concerns about the tapering of quantitative easing, rising interest rates and a potential environment where equities may fall and bond yields rise simultaneously, have led investors to look at ways to hedge their portfolios. The VIX index, or Wall Street’s ‘fear gauge’, is often peddled as such a hedge. At first glance, this makes sense, as VIX (a measure of implied volatility) tends to increase when equity markets sell off, and, historically, has demonstrated a negative correlation to the asset class. However, in our experience, investors tend to be disappointed with the outcome of s...