out like a lamb
After a rocky start, equity markets were able to find their footing in March with the S&P 500 rising 3.7% for the month amid narrowing ranges that dragged VIX futures prices lower. While the VIX futures curve returned to its normal upward slope, it remains at elevated prices that likely reflect ongoing risks from inflation, monetary policy and the Russia / Ukraine conflict. The epicenter of recent weakness in global markets, volatility in bonds (BAML MOVE index, chart below) rose with stocks in back half of March, suggesting that the month’s reprieve in equity markets may only be the eye of the storm.
ICE BAML MOVE Index, Trailing 1 Year. Click for larger image. Source: Yahoo Finance
After abandoning VIX positions early in the bounce, TCM’s Risk-Managed Indexing Strategies performed largely in line with equity indexes in March (Tactical Beta +3.1% Mar, Tactical Q +3.8% Mar), while Alpha Seeker (+1.0% Mar) posted its 3rd consecutive up month and remains TCM’s best-performing strategy on the year.
Hedged Yield (+6.1% Mar) benefitted from an unusual situation in VXX (iPath VIX Futures ETN) which spiked higher after the fund’s sponsor temporarily stopped issuing new shares on March 14th. As explained in this article with a quote from Matt, this created a large premium in shares of VXX that was quickly flagged by the Dashboard and converted to a profit for TCM accounts with exposure. While not expected to repeat often, this is another example of the outsized moves that are possible while the VIX marketplace is sending signs of stress.
right on skew
For such a formidable combination of risks, hedging markets have remained quite tentative in 2022, with the VIX index having yet to exceed its high for the year set intraday on Jan 24. Taking its cues from these same hedging markets, each of two hedging attempts on the year has resulted in mild costs for TCM portfolios, the most common outcome for the strategy's risk management module which seeks to add value not through consistency, but through the "positive skew" inherent in long volatility exposures. This pattern of frequent small losses with less frequent outsized gains is also apparent in Tactical Beta’s VIX attribution history (chart below).
Tactical Beta hedge profile since inception. Source: TCM. Click for larger image.
Despite its well-earned reputation as a losing proposition over time, continuous exposure to long volatility remains the industry-standard risk management technique. TCM stands conventional wisdom on its head by using a tactical approach that rejects the comfort of consistency and seeks to transform hedging from a long-term expense into a return source. This strategy has yielded compelling results but as with any investment, it comes with tradeoffs.
Producing a profit with long volatility exposures requires an investor to often forgo them entirely and then once applied, to anticipate frustration until a market correction becomes a market crisis. This is not easy for most investors, and it is no coincidence that most investors do not ultimately profit from long volatility exposures.
It goes against human nature, but successful investing often requires a willingness to accept that there is no perfect solution. Designed with this mindset, TCM strategies can be useful tools for helping investors reach their long-term goals.