New Study Finds That Certain Options- and Futures-Based Benchmark Indexes Could Help Manage Tail Risk of Traditional Indexes

CHICAGO and BONITA SPRINGS, Fla., March 12, 2012 /PRNewswire/ -- The merits of using options-based and futures-based strategy benchmark indexes to hedge and manage tail risk is the subject of a new study – "Key Tools for Hedging and Risk Management" – released today by investment-advisory firm Asset Consulting Group (ACG). 

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The study, the second of two ACG papers commissioned by Chicago Board Options Exchange (CBOE), compares the performance of "traditional" indexes with the performance of five strategy benchmark indexes that use index options or VIX® futures: the CBOE S&P 500 95-110 Collar Index (CLL), CBOE VIX Tail Hedge Index (VXTH), S&P 500 VIX Mid-term Futures Index (VXMT), S&P 500 Dynamic VIX Futures Index (DyVX), and S&P 500 VIX Futures Tail Risk Index - Short Term (VTRsk).

The study focuses on two different time periods: 25-1/2 years (back to mid-1986) for the CLL Index, and 70 months (back to April 2006) for the four VIX-based benchmark indexes. VIX Index options opened for trading in February 2006.

Highlights of the Study:

• Left Tail Risk in the Past 25 Years: In recent years, many investors have become concerned about mitigating the risk of large portfolio losses, also known as "tail risk."  The study showed that over the past 25 years, the worst monthly loss for the S&P 500® Index was a decline of 21.5 percent, compared to a decline of 28.2 percent for the S&P GSCI (commodity) Index, and a relatively modest 8.6-percent monthly decline for the CLL Index.
• Tail Risk and Diversification in 2008: In 2008, the S&P 500 Index declined by 37 percent; the VXTH Index (with an allocation to stocks and VIX options) declined by 19.3 percent; and the VXMT Index increased by 83.9 percent.
• Lower Volatility: The CLL Index has incurred about 70 percent of the volatility of the S&P 500 over the last 26 years. Select portfolios with the VXTH and the futures-based indexes have had less volatility than the S&P 500 over the last 70 months.
• Enhanced Returns for Portfolios: Portfolios with small allocations to the futures-based indexes and the VXTH had higher returns and lower volatility than the S&P 500 over the past 70 months.

Overview of Strategy Benchmark Indexes Used in the Study:

• CBOE S&P 500 95-110 Collar Index (CLL):  Buys three-month out-of-the-money S&P 500 put options at 95% of the S&P 500 value. Sells one-month out-of-the-money S&P 500 call options at 110% of the S&P 500 value.
• CBOE VIX Tail Hedge Index (VXTH):  Buys one-month 30-delta VIX call options. The weight of the VIX calls in the portfolio varies at each roll depending on the perceived likelihood that a "black swan" event could occur in the near future.
• S&P 500 VIX Mid-term Futures Index (VXMT):  Buys a combination of VIX futures positions in order to reflect the expectations of the VIX Index level in five months. Some of the VIX futures are rolled daily in order to maintain a constant average weighted five-month term.
• S&P 500 Dynamic VIX Futures Index (DyVX):   Buys a combination of VIX futures positions to reflect dynamic allocation between the S&P 500 Short-Term VIX Futures Index and S&P 500 Mid-Term VIX Futures Index. The rules-based allocation is done with the goal of aiming to lower the roll cost of investments linked to future implied volatility.
• S&P 500 VIX Futures Tail Risk Index - Short Term (VTRsk): Calculated using a weight of 45 percent of 2x the S&P VIX Short-Term Futures Index and 55 percent of the Inverse S&P 500 Short-Term Futures Index. The goal of the index is to provide a long volatility exposure whose cost is partially or completely mitigated (due to negative roll yield) via a rebalanced short exposure.

The new study is one of two commissioned studies recently completed by Asset Consulting Group that involve benchmark indexes that may be used for risk-management purposes.  Last month, ACG released "An Analysis of Index Option Writing for Liquid Enhanced Risk-Adjusted Returns," which covers the merits of using options-based strategy benchmark indexes to construct a diversified portfolio.   

In their continuing efforts to provide education for institutional investors, CBOE and Standard & Poor's Financial Services provided funding for this study.  The full Asset Consulting Group studies, as well as a complete listing of CBOE's previously commissioned options-based strategy studies, can be found at www.cboe.com/benchmarks.

About CBOE Holdings, Inc.
CBOE Holdings, Inc. (NASDAQ: CBOE) is the holding company for Chicago Board Options Exchange (CBOE), C2 Options Exchange and other subsidiaries.  CBOE, the largest U.S. options exchange and creator of listed options, continues to set the bar for options trading through product innovation, trading technology and investor education. CBOE offers equity, index and ETF options, including proprietary products, such as S&P 500 options (SPX), the most active U.S. index option, and options on the CBOE Volatility Index (the VIX Index). Other products engineered by CBOE include equity options, security index options, LEAPS options, FLEX options, and benchmark products such as the CBOE S&P 500 BuyWrite Index (BXM). CBOE's Hybrid Trading System incorporates electronic and open-outcry trading, enabling customers to choose their trading method. CBOE's Hybrid is powered by CBOEdirect, a proprietary, state-of-the-art electronic platform that also supports C2 Options Exchange (C2), CBOE Futures Exchange (CFE), CBOE Stock Exchange (CBSX) and OneChicago. CBOE is home to the world-renowned Options Institute and www.cboe.com, named "Best of the Web" for options information and education. CBOE is regulated by the Securities and Exchange Commission (SEC), with all trades cleared by the OCC.

About Asset Consulting Group (ACG)
Asset Consulting Group (ACG) is an institutional Investment Consultant that provides comprehensive investment consulting and investment supervisory services to taxable and tax-exempt investors such as trusts, endowments, foundations and other non-profit corporations, insurance company reserves, and corporate, public, Taft-Hartley employee benefit plans, high net worth individuals, and estates ("Clients").  ACG has provided investment consulting and investment supervisory services since 1989.  ACG consults to approximately 80 clients across the United States and Puerto Rico with aggregate assets of more than $60 billion.  ACG is a research driven firm with 45 employees, 16 of whom are CFA Charter holders.  ACG is widely recognized for providing high quality consulting services in the areas of Asset Allocation Advice, Portfolio Construction, Manager Selection and monitoring and Trustee Education.  ACG has built its practice on the foundation of being an objective third party advisor to our clients. As such, ACG has no relationships or arrangements with money managers to recommend or place them with clients.

ACG was compensated by the Chicago Board Options Exchange for the preparation of this paper.

CBOE®, Chicago Board Options Exchange®, CBSX®, CBOE Stock Exchange®, CFE®, CBOEdirect®, FLEX®, Hybrid®, LEAPS®, CBOE Volatility Index® and VIX® are registered trademarks, and BuyWrite, BXM(SM), , CLL(SM), VXTH(SM), SPX(SM), CBOE Futures Exchange(SM) and The Options Institute(SM) are service marks of Chicago Board Options Exchange, Incorporated (CBOE). C2(SM), C2 Options Exchange(SM) and SPXpm(SM) are service marks of C2 Options Exchange, Incorporated (C2).  Standard & Poor's®, S&P® and S&P 500® are registered  trademarks of Standard & Poor's Financial Services, LLC and have been licensed for use by CBOE.   All other trademarks and service marks are the property of their respective owners.

The CBOE S&P 500 indices (the "indices") are designed to represent proposed hypothetical strategies. The actual performance of investment vehicles such as mutual funds can have significant differences from the performance of the hypothetical indices. Like many passive indices, the indices do not take into account significant factors such as transaction costs and taxes. Investors attempting to replicate the indices should discuss with their advisors possible timing and liquidity issues. Past performance does not guarantee future results. CBOE calculates and disseminates the indices. The methodologies of the indices are owned by CBOE and may be covered by one or more patents or pending patent applications.  The information contained in the ACG study is based on information obtained by ACG from sources that are believed to be reliable. Opinions and estimates offered constitute ACG's judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. The information provided in the ACG study is believed to be reliable, but ACG and CBOE do not warrant its accuracy or completeness. The ACG study is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The views and strategies described may not be suitable for all investors. The ACG study has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained in the ACG study are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation. The views expressed are those of Asset Consulting Group. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm.

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SOURCE CBOE