Volatility ETP due diligence

Selecting a Volatility ETP is not simple!

When performing due diligence on Volatility ETPs, I get much the same feeling that i got some years ago, about Commodity ETPs, when they started to be structured away from exposure to front month futures to further out the term structure to mitigate Contango.

Only in the Volatility space it gets a tad more complex as some ETPs incorporate both Long and Short legs to the strategy, or Mix a long Equity position with Long/Short Vol.

While product exposure is still just centered around VIX, VSTOXX and Citi proprietary Volatility Index, today the number of Volatility Strategies are numerous, and providers have moved from:

1st. generation Volatility products providing static exposure either to Near or Mid-Term future contract, through

2nd. Generation strategies that just like in the Commodity space seek to mitigate Contango or take advantage of Backwardation.

We are now at the

3rd stage where products are being launched with much more advanced but still rule-based refinements either in the form of signal-based enhancements, long/short strategies or structuring aimed specifically at capturing Mean-reversion in Volatility.

The evolution in Volatility products is happening alongside the launch of Leveraged and Inverse Leveraged 1st. Generation of Volatility products, that due to the nature of their path dependency and compounding effect, can be difficult to balance on the product spectrum.

Im constantly refining a list of dimensions to cover in the due diligence on these Volatility products, below is a screen shoot of the current state, if you think im missing something let me know.

Robust and prudently Volatility ETPs has a valid place as a overlay Strategy in any portfolio, and I would suggest you to sign up to our Volatility Group, to stay up-to-date on what is happening in the Volatility Space.