VIX hedging represents the strategic use of financial instruments linked to the CBOE Volatility Index (VIX) to mitigate portfolio risk. It specifically targets protection against sudden increases in market volatility. This strategy aims to safeguard investment portfolios from significant drawdowns during periods of broad market stress.
Mechanism
VIX hedging typically involves purchasing VIX futures or call options, whose values tend to increase when equity market volatility rises. As traditional equity markets experience downturns, often accompanied by rising VIX, the gains from these VIX-linked instruments can offset losses in other portfolio components. This provides a negative correlation benefit during crises.
Methodology
Implementing VIX hedging requires a tactical allocation of capital to volatility products, often based on macroeconomic outlooks, technical indicators, or quantitative models that forecast market turbulence. For institutional investors, this methodology serves as a diversifier and risk reduction tool. It provides a counterbalance to equity exposure and can be relevant for crypto portfolios, which often correlate with traditional markets during systemic stress.
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