S&P creates volatility strategy indices

Standard and Poor's (S&P) has created six volatility strategy indices, designed to respond to specific market environments.

The three sets of indices each have short-term and mid-term versions; the sets are the S&P 500 Vix Futures Variable Long/Short Index, the S&P 500 Vix Futures Tail Risk and S&P 500 Vix Futures Short Volatility Hedged.

"All six of the indices take a long exposure and a short exposure," explains Sid Oberoi, senior director at S&P indices. "They will always have long and short exposure and the long component is leveraged."

The long exposure for each index is achieved through leveraged exposure to the S&P 500 Vix Futures Short-Term or the S&P 500 Vix Futures Mid-Term index. Short exposure is to the S&P 500 VIX Futures Short-Term Index.

Oberoi explains the different goals of each index: "Tail risk tries to take into account any tail risk or black swan type event, it would perform well in an environment where Vix spikes, because it seeks to provide a long volatility exposure.

"The short volatility is self-explanatory - it is shorting volatility, and aims to achieve a positive expected return from the negative carry in Vix futures, while providing a hedge against large spikes in Vix futures. The long/short variable aims to have somewhat a volatility neutral profile."

On the quarterly re-balancing date the long/short index will return to a volatility neutral position. It aims to provide returns linked to volatility, while mitigating the costs associated with holding volatility. This occurs because volatility futures are usually in contango, which means that money is lost when rolling from one contract to the next.

While S&P already has a suite of volatility indices, this new set takes its offering a step further: "This is a generation three product, taking what is already out there and looking at different ways to use it," says Oberoi.

The indices have been licensed to US-based ETP provider VelocityShares, which already offers ETNs linked to S&P's Vix futures indices.

Oberoi says that the number of products based on its existing volatility indices and the amount of assets they have gathered "shows there is an appetite for the products".

ETPs linked to volatility tend to be ETNs, however, Source has an ETF based on the S&P 500 vix futures index, which is listed on the London Stock Exchange.