SmartVXX Trading Strategy

Monthly Performance

Benchmark Performance

Performance Note
Performance is as of November 30, 2018

Strategy Type
Algorithmic

Benchmark
VIXY - ProShares VIX Short-Term Futures ETF (2018-present)
VXX - iPath S&P 500 VIX Short-Term Futures ETN (2010-2017)

Holding Period
Medium Term - from 1 day to multiple weeks and months.

Signal Evaluation
Signals are evaluated once per day in the last hour of trading (between 3pm and 4pm). At most one trade per day is executed. Most days there will be no trades.

Active Period
Oct 15th, 2015 - present

Backtest Period
Jan 30th, 2009 - Oct 15th, 2015 (using VXX)

Risk Profile
This is a high-risk long volatility strategy that is is NOT suitable for any investors because historically markets do not sustain the conditions from which this strategy can profit. This strategy features extreme volatility and many times it is unable to profit even from beneficial VIX futures curve backwardation because volatility of the curve itself is extremely high. This strategy should have no allocation of overall liquid investments. We use it primarily for risk management signaling to identify high volatility regimes.

Strategy Description
This is a long volatility strategy. The goal of this strategy is to take advantage VIXY whenever it goes on a multi-week positive run. The strategy tries to prevent the biggest drawdowns in the VIXY which can be quite detrimental to performance. The strategy will always have full exposure to VIXY if it does have exposure at all. It is either 100% invested in VIXY or 100% in cash. The strategy may have long stretches where it is fully in cash if conditions don't favor VIXY (which is most of the time). Ultimately for a full year, it is expected the strategy to be always absolutely positive and to outperform VIXY on annual basis. The strategy uses the following Volatility Indicators: Contango Roll and VIX. The strategy needs Contango Roll to be very negative to get involved in a trade. This is an conservative strategy that seeks to only be involved in the VIXY if the VIX Futures Curve is heavily in backwardation. The VIX Futures Curve is very rarely in backwardation for a long period of time so the opportunities to profit from this strategy are rare. This strategy will never catch the initial runups in the VIX. It only get involved during substantial drawdowns in the SPX.

Trading Account Considerations
The strategy targets basic 401(k) trading account without margin. Buys are delayed 3 days after a sell to ensure that the account can perform the buy. We assume 0.1% slippage during the trade execution (price above 0.1% of the close price was used to buy and price below 0.1% of closing was used to sell). A trading fee of $7.50 per transaction is assumed. The initial amount for the strategy is $100,000 and when buying, as close to 100% of the portfolio balance as possible is invested. The cash was assumed to generate 0% return.

Updates
2018-02-16
Due to the termination and delisting of the VelocityShares Daily Inverse VIX ST ETN (XIV) on February 15th, 2018, the strategy will start using the ProShares VIX Short-Term Futures ETF (VIXY) instead of iPath S&P 500 VIX Short-Term Futures ETN (VXX). We have decided to stop using Exchange Traded Notes (ETNs) going forward due to the limited nature of the products and tax considerations. In terms of performance, VIXY is very similar to VXX and tracks the same VIX futures index. For tax considerations, short-term VIXY gains are subject to 1256 tax treatment (60% of the gains are treated as long term, 40% as short term) whereas short-term VXX gains are taxed 100% as short-term. If a long VIX strategy is expected to make money over the long term, VIXY should be the preferred instrument.

Disclaimer
Prior performance does not guarantee future returns. We were only able to backtest this strategy during the 2009-2015 period as the VIXY did not exist prior to 2009. In addition, the 2009-2015 period features an unprecended intervention in the capital markets by the Federal Reserve and other central banks via Quantative Easing, Zero Interest Rate Policy and other measures. The backtests reflect the market conditions during that period of time which are unprecedented in history. These conditions resulted in an 6.3% average VIX futures contango thus greatly hindering the performance of loong volatility funds like VIXY. Whether these market conditions will persist in the future is unknown and any change in market conditions in the future may affect the performance of the strategy going forward.

Black Peak Ventures does not provide professional financial investment advice specific to your life situation. SmartVXX is an investment strategy that may not be suitable for your life situation. Black Peak Ventures provides investment analysis of the CBOE VIX futures market and related exchange traded products using algorithmic and discretionary signals derived from proprietary indicators, measurements and analytics.