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Dr. Oliver Schwindler, CAIA

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  • Volatility ETNs: A Viable Hedging Instrument [View article]
    Hi Ken,
    you are absolutely right, the re-balancing guide shifts profits from the previous winner back to the looser over the considered period.
    But, the correlation between the core portfolio and the volatility hedging instrument are far from being -100% over a mid term horizon. Correlation between the two jumps just during market crashes like the one duing 2008 up to nearly -100%.
    However, in principle you are correct the strategy works during a volatile environment better than in a calm period.
    Thanks for your comments,
    May 25, 2011. 06:42 AM | Likes Like |Link to Comment
  • Volatility ETNs: A Viable Hedging Instrument [View article]
    Hi Macken,
    I simply used the S&P VIX Mid-Term Futures TR Index, which is the benchmark VXZ is officially tracking.
    I think that index is a good proxy for the estimated price action of VXZ before its official launch as the real tracking error since its launch is almost non existent.


    May 21, 2011. 10:36 AM | Likes Like |Link to Comment
  • Volatility ETNs: A Viable Hedging Instrument [View article]
    Hi Ken,

    You are pointing to an important consideration.

    Actually, as the portion of the VXZ allocation is re-balanced after a specific period that approach does not rely on VXZ outperforming the core portfolio over a long-term investment horizon. As a matter of fact, VXZ contributed just during 2007 and 2008 a positive result and obviously has caused losses during the last 2 years.

    But the intention of VXZ is not adding alpha in a continuous way rather than to cut off the tail risks of equity portfolios, which was proven during the financial crisis during Sept-Nov 2008.
    Basically, you should think in the following way. In case your core portfolio delivers some alpha that you can invest in some kind of tail risk protection you still can outperform your benchmark as long as the premium paid for protection is lower than the generated alpha.

    Let's take for example the performance of the US Style ERC Portfolio Heged over the last 12 months until end of April. Although we allocated a portion to VXZ, which indeed lost 28% over the last 12 month, the portfolio managed to be just slightly below the benchmarks return of 16.1% over the same period. You see, the alpha generated by the core portfolio was not big enough to compensate the whole losses from the VXZ position.
    However, on a risk adjusted comparison the US Style ERC Portfolio Heged still managed to outperform the benchmark over the last 12 months, as the VXZ position reduced the volatility of the portfolio significantly and the portfolio delivered a Sharpe Ratio of 0.97 compared to 0.86 of the benchmark.

    Hope my explanations show that the success of the portfolio strategy does not rely on the outperformance of VXZ rather than the alpha generated by the core portfolio which offers investors the opportunity to afford some tail risk protection and still outperform the benchmark on a risk adjusted basis over a mid to long-term investment horizon.


    May 21, 2011. 10:31 AM | Likes Like |Link to Comment
  • Volatility ETNs: A Viable Hedging Instrument [View article]
    Dear Mike,
    absolutely, you have to re-balance the portfolio. The core portfolio is rebalanced on a quarterly basis whereas the VXZ component has been rebalanced at year end. Actually, I am currently working on a more dynamic version of the Hedged ERC Portfolios that will utilize VIX options rather than the ETNs.
    May 19, 2011. 04:43 AM | 1 Like Like |Link to Comment
  • It's a Good Time to Consider Insuring Your Portfolio With the VIX [View article]
    It seems that almost all commentators have made their experience with investing/trading the VIX or correctly its derivatives, e.g. VXX and VXZ or options on the VIX.
    Obviously, as one can not trade the VIX directly rather than just futures and options on the VIX, which are in their nature derivatives that are in principle just market expectations of future VIX Index levels and therefore do not closely track the VIX due to the embedded heavy contango term structure in the VIX futures markets.
    However, I support James's original message, using the VXZ as a tool for portfolio protection. The VXZ can be used successfully for protecting a portfolio during crisis, it even works for a buy & hold investment strategy very well.
    As a long as your core portfolio delivers some alpha that is high enough to afford the protection premium implemented in the VXZ it makes sense to add the VXZ with a meaningful position size for portfolio protection. The VXZ position not just protects your capital in market crashes and cuts off the tail risk, it also reduces the volatility of a portfolio and, therefore, increases the risk-adjusted performance significantly.
    I will soon publish an article on SeekingAlpha in the coming weeks about that topic. In the meantime, please feel free to have a look at the hedged versions of the ERC Portfolios on my website
    May 2, 2011. 01:46 AM | 2 Likes Like |Link to Comment
  • Week in Review: Financials in Downtrend [View article]
    The XLF SPDR includes a wide array of diversified financial service firms with business lines ranging from investment management to commercial and investment banking and also insurance companies. Among the companies included in the SPDR are Citigroup, Bank of America, American International Group, Goldman Sachs, Fannie Mae. You can find a detailed list here.
    In my opinion the resent sell off is mainly due to the current problems in the mortgage sector, especially the mortgage backed securities (for example see the near collapse of the Bear Stearn's hedge fund due to mortgage losses). I think market participants are currently demanding a higher risk premium for financial stocks because of the uncertainties in regard to a possible "mortgage implosion" and it's effect on the financial sector.
    Jul 2, 2007. 04:31 PM | Likes Like |Link to Comment
  • Countrywide Financial: The Price is Right, The Market Isn't [View article]
    Dear Erik,

    I think a comparison against the broad consumer financial services is not the right standard of comparison, as there seem to lurk default risks in the books of mortgage lenders. A comparision against other mortgage lenders by far more insightful.

    Sep 8, 2006. 02:38 AM | Likes Like |Link to Comment
  • The Yen is Over-Rated: Don't Buy the Hype [View article]
    Dear Mr. Dr. Enzio von Pfeil,

    you mentioned in your comment the New Zealand and Australian dollar, the Pound, and the Euro. What's about the US dollar? Should the Yen also be weak againts the US dollar?

    Sep 7, 2006. 01:41 PM | Likes Like |Link to Comment
  • Four Undervalued Israeli Small Caps [View article]
    All of the four mentioned stocks are Micro-Caps with less an 100 Mio. $ in marketcap and none of them is currently profitable.
    I think all are very high risky!
    Sep 1, 2006. 09:35 AM | Likes Like |Link to Comment
  • Classic Bull Trap? Last Week's Bull Run Missing Confirmation of Breakouts [View article]

    I have to tell you that I am currently still bearish for the US market.
    However I think there are two important factors which should be followed closely as they currently indicate a different outcome of the latest correction.
    At first, the VIX has broken its support zone between 13-14 on the downside, which can be intertreted as a positive sign for a possible bull market.

    As Gray Dorsch pointed out in his latest Global Money Trends Newsletter, another important factor is the Reuters/Jefferies CRB Index which broke below its 200 day moving average on Thursday. I would interpret this as a negative sign for a possible bull market.

    I think a strong rise in commodities, while the VIX stayes at these low levels, could help the small and mid caps to break out.
    Aug 21, 2006. 07:13 AM | Likes Like |Link to Comment
  • Stock Earnings Yields vs. Bond Yields 1/85-7/06 [View article]
    Hi Barry,

    unfortunatelly, you can not set up a spread trade, since the yield of the S&P depends on two factors, the price of the S&P and the earnings of the S&P companies. The spread could narrow due to falling earnings witout a move in the price of the index.

    Aug 17, 2006. 03:28 PM | Likes Like |Link to Comment