Build The Hedge Yourself!

Earlier this summer I would see a commercial during baseball games for some car buying app and the tag line was AND YOU MAKE THE DEAL YOURSELF! It's a legitimately funny commercial. There's a series of them and they're all pretty funny.

I thought about that commercial this morning reading the daily email from ETF.com that talked about hedging equity exposure with a couple of ETFs that overlay covered call strategies and the Invesco S&P 500 Downside Hedged ETF (PHDG). We've never looked at PHDG before here but the fund has been around for quite a while. It uses VIX futures and cash to try to hedge against equity market volatility. 

The context of this post is about building the hedge yourself as implied by the title to the extent you even believe in hedging. With help from Portfoliovisualizer, Portfolio 1 is 100% PDHG, Portfolio 2 is 85% SPDR S&P 500 (SPY) and 15% ProShares Vix Med Term Futures (VIXM) which is a client holding and Portfolio 3 is 100% SPY.

 

Building it yourself in Portfolio 2, you get almost the same standard deviation with far greater compound annual growth. In all fairness, PDHG offered 146 basis points of outperformance versus the do it yourself version in 2022. I would not put 15% of a portfolio into something like a VIX fund though, that is too much, this is just an example that continues an ongoing conversation. The 15% was a random chance that it turned out the 85/15 has the same standard deviation as PDHG.

Coincidental to my starting to write this post I stumbled into a podcast hosted by Corey Hoffstein who talked to Devin Anderson from Convevitas titled Strategy Versus Structure In Tail Hedging which is what this blog post is about. When I say to mostly avoid complex strategy funds and use narrower tools to build the strategy more directly, the blog today and the podcast are what I am talking about. There are exceptions but plenty of examples where the output of complexity combined with simplicity in fund form just doesn't work out very well. A lot of the funds from Simplify seem to struggle versus the expectation they set, some do look pretty good though in all fairness. The podcast is sort of a confirmation festival for my thoughts on this subject.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.