Volatility Regime Change and SVXY's underperformance - Pt.2

VTS Community,

The Great Volatility Regime Change part 2

Check out part 1 if you missed it here where I'm doing a mini series quantifying what I call the Volatility Regime Change that happened pretty much to the day on February 6th, 2018 after the Volpocalypse event.  That began a huge drawdown, and the Volatility complex is still trying to claw its way back all these years later.

Another way to view this is through the lens of the -0.5x SVXY, an inverse Volatility ETP that is essentially "Short Volatility" exposure through the front two month VIX futures.

-0.5x SVXY performance since Jan 1, 2012:

As always when I'm flashing charts of the various Volatility ETPs I feel it necessary to state in no uncertain terms, we are not buy and hold investors.  We're tactical with our strategies and certainly always on stand by to exit to safety if the Volatility market is flashing warning signs.

We're only holding SVXY on roughly 62% of trading days, in safety Gold about 35% of days, and in Long Volatility about 3% of trading days.

I'm certainly not suggesting that anybody would or even could have held on to something as wild as SVXY for 13 years.  It's just to demonstrate the stark difference in performance before and after the February 5th, 2018 Volpocalypse disaster.

While a 15.66% annual return is actually pretty decent, the numerous and deep drawdowns would simply make it unsustainable.  Add to that, aside from a few pronounced market crashes, it's largely been a bull market for the entire period.  When the next recession finally hits, mark my words that current maximum drawdown will be beaten quite easily.

Pre / Post Volpocalypse

Now we can check out that dividing line and it's not hard to see where the golden age of short Volatility quickly became the 6 year drawdown.

Later in this mini series I will be comparing our own Tactical Volatility performance and see how we stack up to those two periods, but the point today is just to show that the -0.5x SVXY is barely positive in the last 7 years.  That's something that has slipped under the radar of many traders. 

It is harder to make a huge return when the underlying asset itself is flat, so it requires some creativity and strategy design to actually still turn a nice profit.  Those golden years may have led a few traders to believe that Short Volatility is easy, and sometimes it is.  Most of the time though, it does require out of the box thinking to keep making progress even if the underlying isn't cooperating.

You could easily make the claim  (and I will do just that soon)  that from 2012 to 2017 the Short Volatility trade was king and equities were clearly worse, and since 2018 it's actually equities that are crushing the Short Volatility trade.  A tale of two markets so to speak.