TCM portfolios apply a consistent process to capture an inconsistent benefit- the VIX “skew”, or its historical tendency to produce positive outlier events. Like so many times this year, TCM portfolios have begun the first stage of this process, deploying an initial tranche of protection as a turn in markets begins to invert VIX futures pricing. Should the inversion deepen, hedges are increased until the VIX enters crisis territory where its positive outlier events live. With VIX exposure at maximum 30%, these events can then produce a massive hedging benefit.

Despite historically long odds, a “soft landing” scenario seems to have been the hedging market’s base case all year, resulting in VIX complacency that has precluded any hedging benefit thus far. July’s rally was a welcome reprieve that began to normalize the VIX / S&P relationship from the S&P side and now begs an important question: is the Fed really about to pull off a miracle, or is this just the eye of the storm?

simultaneous declines of this year’s magnitude in both VIX futures and the S&P 500 were last recorded in August 2011 and September 2008, on the eve of two market crisis periods that caused the VIX / S&P “pendulum” to swing firmly in the opposite direction, from negative to strongly positive VIX hedging potential in a short period of time.

TCM’s risk management process is simple: buy VIX futures when they begin to show signs of stress, aiming to offset equity declines as their value further increases in a subsequent crisis. Over the past six years, this method for balancing hedging cost and effectiveness has produced results that have attracted significant assets, not through a string of continuous victories but from a handful of critical moments when the explosive “skew” of VIX exposure protects portfolios more like an airbag than a seatbelt. Though the process is consistently applied, its results vary with the VIX / S&P relationship that is unique to each period.

Along with enabling the misallocation of capital with excessively loose policy, the Fed has a history of raising rates until a market crisis forms. In a globally interconnected system, any failure has the potential to propagate quickly and it is in this scenario where VIX prices become unhinged and provide powerful protection during periods like the Great Financial Crisis in 2008, the US Debt Downgrade Crisis in 2011 or the Corona Crisis in 2020. Especially in these periods, VIX protects like an airbag, not a seatbelt.