Building a Long Volatility Strategy without Using Options – II

A systematic approach to creating portfolio protection

August 2021. Reading Time: 10 Minutes. Author: Nicolas Rabener.


  • Long volatility strategies can be built without using options
  • Portfolios would have primarily consisted of certain currency pairs and treasury bonds
  • They lack explosive returns when volatility spikes, but they also lack the bleed


Almost all asset classes are implicitly short volatility as they are bets on the economy doing well. Occasionally there are periods like during the tech bubble in 1999 when stocks were volatile and going up, but mostly increasing volatility means markets are declining or crashing as a result of deteriorating economic conditions. 

Bonds are also bets that governments and corporates are able to repay borrowed capital, which is more likely when the economy is not heading into a recession. The same applies for private equity or real estate – try selling that private company or office building when GDP is contracting.

Given this, most investors’ portfolios are not diversified properly as they lack exposure to long volatility strategies. The three core reasons for this is that i) long volatility strategies are painful to hold as they tend to lose money most of the time, ii) they lose money when almost every other asset class generates positive returns, and iii) they are complex as they usually use options in the portfolio construction.

We recently explored a naive approach to creating a long volatility strategy systematically without using options. The model was to select asset classes that were highly correlated to the VIX when the index spiked. However, our analysis was based on 13 periods in the period between 2006 and 2021, which is a limited sample size. It is also not a particularly dynamic approach (read Building a Long Volatility Strategy without Using Options).

In this research note, we will explore building a dynamic and systematic long volatility strategy.


Our framework is to select asset classes from a set of 59 indices that are highly correlated to the VIX and measur